Moody's downgrades China's credit rating

Gladys Abbott
May 29, 2017

The credit rating agency announced that it was cutting China's long-term local currency and foreign currency issuer ratings by one notch from Aa3 to A1, citing the expectation that China's financial strength would erode due to rising economy-wide debt.

The news of the downgrade in China's long term local currency rating - one notch to an A1 rating from AA3 saw Chinese stockmarkets sell off by 1% for a while before they recovered, while the Australian dollar dropped by around 0.3% before steadying to trade around 74.50 United States cents.

CHINA'S Ministry of Finance dismissed yesterday's decision by Moody's Investors Service to downgrade the country's credit rating for the first time in almost 30 years, saying the ratings agency was exaggerating economic difficulties and underestimating reform efforts.

Beijing must also deliver on its official targets for growth which will likely make the economy more reliant upon stimulus said Moody's. Moody's also changed its outlook on China from "stable" to "negative".

In reaction to the Moody's downgrade, analysts at Nomura predicted that high debt levels and other financial risks will contribute to a slowdown in China's growth in the years ahead.

The finance ministry noted the growth rate ticked up to 6.9 percent in the quarter ending in March and said tax revenue rose 11.8 percent in the first four months of the year.

Meanwhile, growth in the world's second largest economy has dropped from 14.2% in 2007 to 6.7% a year ago.

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Moody's, however, changed its outlook for Hong Kong to stable from negative, saying the government's vast cash pile can help the territory ward off financial and economic shocks. The ministry added that the agency's assessment was based on "inappropriate methodology".

It said the government's debt ratio a year ago was 36.7 per cent, lower than major market economies, and that the "expansion of the scale of government debt has been effectively controlled".

He added that the Chinese government has been making adjustments alongside "comprehensive and co-ordinated action on deleveraging" by regulators.

'A psychological blow'Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, described the downgrade as "a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures". That means China can still "monetize" its debt or proceed with domestic forms of haircuts if need be.

David Cheetham, XTB, said: "The first downgrade to China from Moody's in nearly 30 years has caught the attention of traders this morning as the nearly forgotten narrative of a slowdown in economic activity in the Far East could be set to return".

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