Mining stocks hit by China downgrade on growth fears

Concerns over the strength of the Chinese economy has led to Moody's downgrading the nation's credit rating for the first time in more than a quarter of a century.

Schroders emerging market economist Craig Botham warns the attempts by China's authorities to tighten policy have contributed to significant moves in bond yields, which highlights how hard it will be for the Chinese government to deal with the debt issue.

However, it highlighted that official growth targets are likely to fall at a more gradual pace, given the importance the Chinese government attaches to them, "rendering the economy increasingly reliant on policy stimulus".

Moody's also cut the rating of 26 state-owned enterprises by one notch, shortly after the main sovereign downgrade. MSCI's broadest index of Asia-Pacific shares outside Japan closed 0.05 percent lower.

S&P and Fitch have also revised their ratings, placing China's foreign and local currency long term debt at AA- with a negative outlook, and A+ with a stable outlook, respectively. In March of previous year, it cut China's outlook to negative from stable.

The country is trying to contain financial risks and to avoid asset bubbles forming while maintaining growth.

While in the basket of currencies, the biggest loser was the Australian dollar, which was often respected as a proxy for China due to the its position as a leading trading partner. The agency also cited a potential negative impact to the central government's finances, but at the same time shifted its outlook from negative to stable.

"Pricing of risk remains incomplete, with the cost of debt still partly determined by assumptions of government support to public sector or other entities perceived to be strategic", it said.

Banks, lenders and other financial companies ticked down as traders interpreted the Federal Reserve's meeting minutes as somewhat noncommital on a widely anticipated June rate rise.

Moody's decision came as China tries to clean up a toxic brew of unregulated and risky lending that for years has fuelled the economy's spectacular growth, though some analysts doubt Beijing's willingness to quit its debt addiction. Or does it somehow have an ability to extend infinite credit lines, or at least reduce debt levels? 'Move makes no sense' But Liao said the move "makes no sense" because China's growth has improved from a year ago and the threat of trade protectionism from US President Donald Trump's administration has subsided.

Moody's said it expects the government's direct debt burden to rise gradually towards 40% of GDP by 2018 "and closer to 45% by the end of the decade".

  • Zachary Reyes