Hong Kong dollar fluctuates after Moody's cuts city's credit rating

While the move brings Moody's in line with rival agency Fitch, which has had an equivalent A+ rating on China since November 2007, Standard & Poor's recently upgraded China's rating to AA-, which is one notch above Moody's new rating. Wednesday's one-notch cut was the first in almost 30 years.

Chinese economic growth has slowed significantly over the past years, from double digit GDP growth of 10.6% in 2010 to 6.7% in 2016 - the weakest level growth since 1990.

Moody's on May 24 slashed China's credit rating for the first time in nearly three decades citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate".

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. In addition, authorities have moved cautiously to avoid knocking their economy growth, by gingerly increasing interest rates for the short-term while tightening their regulatory supervision.

A finance ministry statement accused Moody's of using "inappropriate methods" that it said gave a false picture of China's financial outlook.

The downgrade is likely to increase - if only modestly - the cost of borrowing for Beijing and Chinese state-owned organisations, and it remains within the investment grade rating range.

The Shanghai Composite index dropped 0.6% to 3,043 as at 7.15am GMT on Wednesday, a seven-month low, although it had rebounded slightly from lows of 3,022 earlier in the trading day.

Those fears were evident in the Australian dollar's decline from more than 75 USA cents last night to 74.5 United States cents around 5:30pm (AEST). The ratings agency also changed its outlook for China to stable from negative.

Global banking and financial advisory provider Macquarie, "This news is a clear China negative in our view (even though the rationale for the downgrade contained nothing new)", and "The next question is whether S&P will follow Moody's".

Chang Liu, China economist at Capital Economics, said activity in the country was likely to slow further in the forthcoming quarters as officials continue their efforts to rein in credit risks. It said that, in absolute terms, China's debt level was not high compared to the likes of the U.S. and UK. "And expected medium-to-high GDP growth in the coming years will also provide fundamental support for reining in local government debt risks".

Moody's said that the downgrade reflects its expectation that China's financial strength will "erode somewhat" over the coming years.

Moody's forecasts the government's direct debt burden to rise gradually to 40% of gross domestic product by 2018 and closer to 45% by the end of the 2020.

The debt owed by local or central SOEs must only be borne by the enterprises themselves instead of governments, according to China's corporate laws.

A report by the New York Times had listed China's total debt at $26.6tn (£20.4tn) for 2015, raising fears about a financial crisis that would mirror the 2008 USA crisis.

  • Zachary Reyes