Moody's cuts China rating citing rising debt, slowing growth

GDP growth in China peaked at 10.6 percent in 2010, before falling to 6.7 percent previous year.

Moody's Investors Service cut China's sovereign credit rating for the first time in almost three decades, citing expectations that the country's financial strength will deteriorate in the coming years as debt keeps rising and the economy slows.

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.

According to Khoon Goh, David Qu and Raymond Yeung, researchers at ANZ, Moody's decision to downgrade stems from "their expectation that China's debt will continue to rise while potential growth slows, eroding the country's credit metrics".

"The direct impact is that this would make China's debt financing more hard and the financing cost would also raise", Liao said.

It added to its losses Wednesday after the Moody's announcement, trading down 0.6% by the early afternoon.

Government-led stimulus has been a major driver of economic growth over recent years, but the pump-priming has also been accompanied by runaway credit growth and has created a mountain of debt - now standing at almost 300 percent of GDP. She said the risks to China's financial system were "broadly balanced".

The offshore yuan extended losses after Moody's downgrade, weakening 0.12 per cent to 6.8889 per U.S. dollar as of 8:24am in Shanghai.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August.

"Of course we're not really sure of the details of the budget plan, and what form it will finally take, but it has given the market the perception that everything is moving forward again, after recent distractions such as "Russia-gate", said Mitsuo Imaizumi, Tokyo-based chief foreign-exchange strategist for Daiwa Securities.

Chinese stocks and commodity futures, along with the Australian dollar, have also come under selling pressure today.

Investors awaited the minutes of the Fed's latest policy meeting, scheduled to be released at 1800 GMT later on Wednesday. "Though a hike is not a done deal, it is still widely expected", Imaizumi said. The yuan dropped 0.1 percent against the dollar, and the cost of insuring five-year sovereign debt from nonpayment rose 3 basis points.

USA crude was up 0.1 percent on the day at $51.52 per barrel, while Brent crude futures were up slightly at $54.16.

Spot gold edged up slightly to $1,251.09 an ounce.

  • Zachary Reyes