Moody's China downgrade 'illogical', overstates debt

The move comes 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 its willingness to quit its debt addiction.

Moody's said China's financial strength was likely to erode as growth slows and debt rises further.

Moody's reasons that though India's debt-to-GDP ratio has come down to 66.7 per cent from its peak at 84 per cent in 2003, interest payments take away one-fifth of the government's revenue. China's finance ministry said Moody's was overestimating the country's economic difficulties and underestimating its reform efforts.

Echoing the ministry, the National Development and Reform Commission (NDRC), China's top economic planner, said Wednesday that deleveraging, as a major task of the country's supply-side structural reform, was making progress and China's debt risks were controllable.

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.

The MOF pointed out another error in Moody's credit rating criteria as it mingled government debt with local government financing platforms and debt of State-owned enterprises.

Beijing rejected the cut, saying Moody's had used an "inappropriate" method to assess the risks facing the economy.

Moody's said the downgrade on Hong Kong reflects its view that China's rising debt would have a significant impact on Hong Kong because of close ties between the two places.

However, according to the IMF, while state-owned debt is high, China's external debt is relatively low by global standards.

In March 2016, Moody's cut its outlook on China's ratings to negative from stable, citing rising debt and uncertainty about authorities' ability to carry out reforms. The Chinese credit profile, for example, is expected to weaken, but the damage is an obstacle that China can overcome in time.

The downgrading of the China's credit rating has anxious the metal investors globally and domestically. Standard & Poor's rates China's debt a notch higher.

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

"The Chinese infrastructure programme was what helped push metals prices higher in the first quarter of this year and the last quarter of last year - there is an expectation that this has run out of steam", he said. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

  • Zachary Reyes