Moody's cuts China rating for first time in 30 years

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. Beijing has been eager to ensure economic stability in the run-up to that meeting.

As the growth of the old Western economies, particularly the USA and Europe, has slowed and the negative growth of Japan, once the world's second largest economy, has persisted, China has become the engine of the global economy.

How's China doing in tackling its growing debt problem?

Moody's cut China's debt rating to A1 from Aa3 because of rising national financial obligations and worries that GDP growth rate will slow.

"China's economy is expected to maintain steady and relatively fast growth thanks to the deepening reforms in state-owned enterprises, finance, taxation and pricing, in addition to the implementation of the Belt and Road Initiative", the MOF said. It said that while planned reforms will transform the economy and financial system, they will not prevent an increase in debt and potential government liabilities. Iran is also backing the extension, as the limit imposed is close to the country's current maximum capacity. In particular, in this scenario, the risk of financial tensions and contagion from specific credit events could rise, potentially to levels no longer consistent with an A1 rating.

Fears are mounting that China is flirting with a potential disaster worse than the U.S. sub-prime collapse that sparked the global financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade".

China has rejected a move by Moody's to lower its credit rating, saying the downgrade exaggerates the difficulties facing the economy and underestimates the government's reform agenda. In the onshore yuan market, where the central bank has a firm grip, the pair is up at 6.8932 from 6.8897 Tuesday.

The ratings agency Moody's has cut its assessment of China's creditworthiness for the first time in 30 years after flagging concerns over the country's financial strength.

Yields on Chinese government bonds, which rise as the price falls, briefly edged higher before finishing largely unchanged. Chinese banks account for about two thirds of all trading in China's $8 trillion bond market.

"I don't think [the downgrade] came as a surprise to people invested in China", said Hao Hong, head of research at BoCom International in Hong Kong.

Liyan Qi, Grace Zhu, Saumya Vaishampayan and Mark Magnier contributed to this article.

  • Zachary Reyes