Moody's cuts China credit rating over rising debt

In a statement released in the wake of the Moody's, the Chinese finance ministry defended the Chinese economy and said the first quarter of the year had seen steady growth with better-than-expected economic indicators. The country has for years been pumping credit-fueled stimulus as part of efforts to achieve growth internally rather than relying on exports, but this has raised fears about China's rising debt levels.

China's total outstanding credit surged to 260 percent of GDP by the end of previous year and the International Monetary Fund has warned that a debt crisis in the country could "imperil global financial stability".

Most investors were not taken aback by China's downgrade from an Aa3 credit rating to an A1 on Wednesday, arguing that markets were similarly prepared for such a move.

Asian shares scaled two-year highs on Thursday after the U.S. Federal Reserve signalled a cautious approach to future rate hikes and the reduction of its $4.5 trillion of bond holdings.

Moody's said financial ties between Hong Kong and the mainland were becoming deeper.

"The Moody's downgrade is based on an inappropriate method ..." The Chinese credit profile, for example, is expected to weaken, but the damage is an obstacle that China can overcome in time.

As noted by The Wall Street Journal, this latest downgrade will likely increase the cost of borrowing for Chinese firms, with the revision of China's rating likely to have a knock-on effect on the country's banks.

For the first time since 1989, Moody's rating agency has cut its view of the creditworthiness of China as it forecasts the country's battle to control debt and stimulate economic growth will get harder.

The Chinese finance ministry criticized the move and said Moody's overestimated the difficulties facing the economy while failing to give adequate weight to economic reforms underway. "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". "China's leaders from President Xi Jinping down have said that structural reform and financial stability are priorities".

The ministry said that China's liability ratio of the government is standing at 36.7 percent to GDP by the end of 2016, lower than the European Union's 60 percent and far below the level of other major economies and emerging markets.

China's debt problems stem from the global financial crisis, which began in 2008. Chinese stocks sank Wednesday after Moody's cut the country's debt rating and othe.

Systemic risk is relatively lowThe NDRC statement added, "China's debt is mostly domestic and our leverage is supported by a high deposit rate (at around 50 per cent), so the possibility to trigger systemic risks is relatively low". Beijing has responded by flooding the economy with credit.

  • Zachary Reyes