Moody's Cuts China Down To Size

Moody's last downgraded China's rating in 1989, months after the Tiananmen Square Protests.

Shanghai: Hong Kong shares followed Asian markets higher on Thursday, even after Moody's downgraded Hong Kong's local and foreign currency issuer ratings shortly after cutting China's ratings on Wednesday.

The downgrade also came about a month before MSCI announces whether to include Chinese-listed stocks into its indexes.

"It overestimated the difficulties that the Chinese economy is facing", the ministry said in a statement, adding that the government's debt ratio past year was 36.7 percent, lower than major market economies, and that the "expansion of the scale of government debt has been effectively controlled".

Investor confidence in Chinese economy is supported by ample positive indicators.

"The downgrade in Hong Kong's rating reflects Moody's view that credit trends in China will continue to have a significant impact on Hong Kong's credit profile due to close and tightening economic, financial and political linkages with the mainland", it said in a statement. "While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government", Moody's said.

Unsurprisingly, China's finance ministry didn't agree with the move.

Moody's growth forecast for China, over the next five years.

Moody's has warned China for its slowing economy and rising debt.

In 2013, Fitch Ratings downgraded China's debt to A+ (the same as Moody's current rating), while the S&P gives China a slightly higher rating of AA-.

Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.

The cut to China's long-term local currency rating puts the country on par with Czech Republic, Estonia, Israel, Japan and Saudi Arabia and one level below other sovereign borrowers, including Taiwan and Macau, and one notch above the likes of Bermuda, Botswana, Poland and Slovakia.

The government's direct debt burden, which is now at a modest level of less than 40% of GDP, is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%).

China's total debt reached 253% of its GDP in 2016, up from 213% in 2013 and 149% in 2008, according to JP Morgan.

"China's economy made a good start in the beginning of this year, showing that the results of the reforms are manifesting", the Ministry of Finance said in a statement posted on its official website.

  • Zachary Reyes