The decision by rating agency Standard & Poor's (S&P) to cut its outlook on China's sovereign bonds from stable to negative flies in the face of facts and may mislead global investors.
The downgrade reflects concerns over China's economy in general, as the world's second largest economy is slowing amid a painful transition.
However, it is not sufficient to justify an outright downgrade of its outlook. First and foremost, the fundamentals of the Chinese economy remain sound and solid, and are improving.
It may be a coincidence that the announcement of S&P's decision was followed by the release of a closely watched indicator showing China's economic outlook is marching into "positive" territory.
Activity in China's vast manufacturing sector, measured by the PMI, grew for the first time in nine months in March, adding another hint of recovery, according to official data Friday.
The S&P said the downgrade is based on its judgment that China's economic rebalancing will likely proceed more slowly than expected, and economic and financial risks to the Chinese government's creditworthiness are "gradually increasing."
Criticism about the pace of China's economic restructuring is misplaced. It is impossible to complete rebalancing overnight, especially for China.
It takes time to digest the legacy of a long economic boom, and China, the world's largest developing and most populous country, has to strike a balance between remaking the economy and securing growth to create jobs.
China has moved into high gear to wean its economy from excessive reliance on investment, exports of low-end goods and energy consumption, and the efforts are paying off.
In 2015, consumption accounted for over 66 percent of China's gross domestic product (GDP), up 15.4 percentage points from 2014. The hi-tech industry expanded much faster than the industrial sector as a whole, and energy consumption per unit of GDP is also falling.
The S&P also got it wrong on economic and financial risks.
The figures speak for themselves. International institutions usually use two indicators to evaluate a country's fiscal risks: its deficit should not exceed 3 percent of GDP, and the general government debt-to-GDP ratio should not exceed 60 percent.
Official data showed that China's fiscal deficit in 2015 accounted for 2.3 percent of its GDP. Estimates by international institutions put China's government debt at about 40 percent of GDP, far below the 60-percent threshold.
In addition, the Chinese government has shown a solid track record of intervening at the right time to stop risks from escalating out of control.
This is the second major global rating agency to have cut its outlook on China in a month. Earlier in March, Moody's cut its outlook on Chinese sovereign bonds, citing increasing capital outflows and rising debt.
China can take the warnings as a reminder of the daunting challenges facing its economy, but if global investors follow the advice of the rating agencies and short China, they may suffer losses.
These agencies, which have long had a monopoly on credit counseling, have missed the mark on more than one occasion. Take Lehman Brothers for example. In the days leading up to its collapse, all three major rating agencies kept the bank's rating at A or higher.
S&P and its fellow rating agencies should dig into the economic and financial fundamentals of world economies, including China's, before rendering their verdicts.
