China's credit rating downgraded over debt concerns

The downgrade by one notch to an A1 rating from Aa3 comes at a time when the Chinese government is grappling with the challenges of slowing economic growth and rising financial risks stemming from soaring debt.

The New Zealand dollar dipped below 70 United States cents as credit rating agency Moody's Investors Service downgraded China's rating on fears rising debt levels could stifle growth in the world's second-biggest economy, which is also New Zealand's and Australia's biggest trading partner.

The rating agency attributed the decision to expectations that China's economy-wide leverage would increase further over the coming years, planned reform program would likely slow, but not prevent the rise in leverage, and sustained policy stimulus would cause rising debt across the economy.

While BNP's Kyoya Okazawa believes the effects will be limited over the long term, Liao Qun, Hong Kong-based chief economist of Citic Bank International, said the ratings cut would certainly hit China negatively by making China's debt financing more hard amid rising financing cost.

Moody's warned China's financial strength will "erode somewhat" as growth slows and said its debt will continue to surge.

Moody's said China's rising debt levels would be coupled with slowing activity and that overall growth would fall to around 5 per cent over the next five years, from 6.7 per cent last year.

This is published unedited from the IANS feed.

The blue-chip CSI300 index .CSI300 was unchanged at 3,424.17 points, while the Shanghai Composite Index .SSEC added 0.1 percent to 3,064.08 points.

Beijing has cited reducing financial risk as a top priority this year but private sector analysts say it is moving too slowly in clearing away a backlog of nonperforming loans. It last downgraded the country in 1989. The rating is still among the agency's highest but could lead to higher borrowing costs.

Yes Moody's. the firm that kept Enron's investment-grade rating and did the same for Lehman Brothers has issued a very questionable downgrade of China.

Schroders emerging market economist Craig Botham agreed that markets had already taken stock of China's leverage to growth ratio, mitigating some of the immediate negative reactions from the ratings announcement. Standard & Poor's rates China's debt a notch higher.

The Australian dollar lost almost half a percent on the news but in early European trade had recovered to trade just 0.2 percent lower at $0.7460.

At the same time, Beijing's need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus, Moody's said. Moody's said the new rating outlook is stable, however, and said the country remains resilient to negative shocks and that growth is likely to remain comparably strong in the near-term. China's massive debt been at the center of concerns among economists and Beijing in recent months, and has rattled global financial markets since late previous year.

Moody's has no specific timetable for re-visiting China's rating, but would monitor conditions on a regular basis, said Marie Diron, associate managing director of Moody's Sovereign Risk Group.

  • Carolyn Briggs