China dismisses Moody's downgrade decision

Moody's said China's economy-wide leverage will increase further over the coming years, planned reform program is likely to slow, but not prevent, the rise in leverage, and sustained policy stimulus will contribute to rising debt across the economy.

The rating agency Moody's has downgraded China's sovereign credit rating from Aa3 to A1, which is the fourth highest rating in Moody's credit scale.

The decision by Moody's Investors Service to downgrade China's credit rating is "illogical" and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper on Thursday.

Moody's last downgraded China's credit rating in November of 1989, months after the bloody crackdown on democracy protesters in Beijing's Tiananmen Square.

Chinese stocks fell in early trading after Moody's announced the downgrade, with the benchmark Shanghai Composite Index falling 1.01 percent, or 31.01 points, to 3,030.94. S&P's AA- rating is one notch above both Moody's and Fitch Ratings, leading to speculation among analysts that S&P could also downgrade soon.

The ratings agency also changed its outlook for China to stable from negative.

In a bluntly worded statement, Moody's said China's commitment to fast economic growth would push the country to continue a borrowing binge that has already raised alarm bells. The government is trying to make the economy more productive by giving market forces a bigger role and through "supply side reform", or shrinking bloated industries such as steel and cement in which supply exceeds demand, which has depressed prices and led to financial losses.

Lou said China understood rating agencies' concerns about problems such as local government debt, but the government had taken measures to address the issue and it didn't need to consult or seek support from the agencies.

Meanwhile, China's potential GDP growth is likely to slow towards 5 percent in the coming years, but the slowdown is likely to be gradual due to expected fiscal stimulus, it said.

Mei said China's economic performance this year had exceeded market expectations and criticized Moody's for including debt at state-owned enterprises (SOEs) and local government financing vehicles as indirect government liabilities.

A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount.

  • Zachary Reyes