It also comes less than a month ahead of a highly sensitive twice-a-decade Communist Party Congress which will see a key leadership reshuffle.
Stephen Gallo, European head of FX strategy at BMO Financial Ground told CNBC via email that China’s domestic debt dynamic is a long-standing issue that most investors are already well aware of.
“To be sure, the move by S&P this morning merely brings the ratings agency into line with where Moody’s and Fitch already were (i.e. 4 or 5 notches below triple-A). Therefore, the direct economic/market impact of today’s decision by S&P is low.”
Gallo further explained that this is not going to necessarily see direct translation into a weaker currency because restrictions on outbound flows are still relatively tight.
“If anything, the decision by S&P highlights the degree to which China will aim to keep leverage growth within the domestic economy low-to-moderate as opposed to high. This means that neither onshore rates nor the RMB are likely to drop sharply as a result of today’s news.”