China Downgraded by Moody's As Debt Increases

Gladys Abbott
May 26, 2017

The downgrade is a reflection of Moody's expectation that the country's financial strength will weaken in the next few years, following a continuously rising economy-wide debt and a slowing down of potential growth.

Moody's Investors Service downgraded Hong Kong's local and foreign currency issuer ratings just hours after it cut China's credit ratings for the first time in almost 30 years.

In March of 2016, Moody's lowered its outlook for China ratings from stable to negative, citing increasing debut and an uncertainty related to the ability of authorities to carry out needed reforms.

Moody's Investors Service has downgraded the credit rating for China.

Mei added that the China downgrade amounted to a "double standard" compared with how countries in Europe and the United States were treated.

However, Liao said the move "makes no sense", because China's growth has improved from a year ago and the threat of trade protectionism from US President Donald Trump's administration has subsided.

The government's direct debt burden, which is now at a modest level of less than 40% of GDP, is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%).

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Most investors were not taken aback by China's downgrade from an Aa3 credit rating to an A1 on Wednesday, arguing that markets were similarly prepared for such a move.

Moody's also changed the outlook for China to stable from negative, saying the now stable outlook reflected the assessment that risks were balanced.

The downgrade is likely to modestly lift borrowing costs for Beijing and its state-owned enterprises but remains comfortably within the investment-grade rating range.

"The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen", Moody's said.

China's finance ministry responded that Moody's downgrade is "inappropriate" because it's based exclusively on economic fluctuations. Fitch's current rating for the country, A+, is its fifth-highest. "The direct impact is that this would make China's debt financing more hard and the financing cost would also rise". "Equity markets in China initially fell sharply on the news and while having pared back some of the losses, are still underperforming this morning", said Deutsche Bank's Jim Reid.

As a result, the Shanghai Composite index dropped 0.6% to 3,043 as at 7.15am GMT time, a seven-month low according to Reuters, though it had rebounded slightly from lows of 3,022 earlier in the trading day.

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic".

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