Markets brush aside China rating downgrade

Global rating agency Moody's has downgraded China's credit rating to A1 from Aa3, saying it expects the financial strength of the economy to erode in the coming years as growth slows and debt continues to rise.

China's Finance Ministry on Wednesday dismissed a decision by worldwide rating agency Moody's to downgrade China's long-term local currency and foreign currency issuer ratings. The downgrade could also raise the cost of borrowing for the Chinese government.

"We expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile", Moody's said in a statement. Fitch's current rating for the country, A+, is its fifth-highest.

Moody's has Japan at the same A1 rating China is now on.

The U.S. currency also managed to halt its slide against the euro, which had enjoyed a bull run this month on factors including an ebb in French political concerns, upbeat euro zone data, and a widening German-U.S. government debt yield spread.

According to Moody's, the down tempo of the GDP movement was mainly because of the lack of structural development, and it is expected to continue to be stagnant for the following years.

"In particular, China's recent regulatory tightening should help deflate the country's credit markets and lead to long-term market stabilisation". China posted economic growth of 6.9% in the first quarter. It said China's financial strength is likely to erode as growth slows and debt will rise further.

Julian Evans-Pritchard, China Economist at Capital Economics in Singapore, said steps to resolve the debt overhang, such as debt-for-equity swaps at state-owned enterprises, were insufficient to deal with problem.

On currency markets, the yuan traded marginally lower against the U.S. dollar, while the Australian dollar, which is often seen as reflecting China's prospects due to the ties between the two countries, also slipped against the greenback.

The yuan's steady performance in the wake of the downgrade prompted some market participants to suspect intervention from the country's central bank.

"[These] features enhance debt servicing capacity and reduce the risks of financial contagion in the event of a negative shock", the report said.

The US Dollar was generally a little firmer with investors looking to the minutes of the May 2-3 Federal Open Market Committee Meeting for clues about the likelihood of a June interest rate rise.

Yields on Chinese government bonds, which rise as the price falls, briefly edged higher before finishing largely unchanged. China is among the largest export markets of both nations. The downgrade comes as China is planning to launch a bond connect program with Hong Kong that would allow foreign investors to more easily access the mainland market.

  • Zachary Reyes