Moody's downgrades China's credit rating to A1 from Aa3

Global ratings agency Moody's on Wednesday cut China's credit rating for the first time in almost 30 years over concerns about its growing debt mountain.

The country's finance ministry claimed the credit rating agency used "inappropriate methodology" in its decision to lower long-term local and foreign currency issuer ratings from "Aa3" to "A1".

The Australian dollar hit a low of 74.43 United States cents after Moody's downgraded China's long-term credit rating to A1 from Aa3, reflecting its view that China's financial strength will weaken in the coming years as economy-wide debt rises and potential growth slows.

The agency warned that China's economy-wide debt is expected to rise further over the comin.

Sean Callow, a senior currency strategist at Westpac, told Bloomberg the downgrade had jolted markets, and the fall in the Australian dollar "is probably driven by fear Moody's could be right that China's heavy indebtedness threatens its medium-term growth prospects and thus demand for commodities".

Earlier this month, the International Monetary Fund (IMF) revised up its forecasts for growth in both China and Japan.

In reaction to the Moody's downgrade, analysts at Nomura predicted that high debt levels and other financial risks will contribute to a slowdown in China's growth in the years ahead.

China's sovereign debt is mostly held by domestic investors, shielding the nation somewhat from the impact of ratings changes. Credit rating agency Moody's has cut its credit rating for China, Wednesday, May 24, 2. "It over-estimated the difficulties that the Chinese economy is facing", the ministry said in a statement.

Fitch already had China at A+ but Standard & Poor's still has the country at AA- with a negative outlook, meaning another negative ratings action is possible in the near term.

The Chinese government has criticised worldwide ratings agency Moody's, saying its first ratings downgrade in 30 years was based on "inappropriate methods" of pro cyclical rating.

"The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account".

While China's leaders acknowledge the necessity for effectively containing financial risks and asset bubbles, financial authorities wary of knocking economic growth, are not ready to raise short-term interest rates and tighten regulation.

The downgrading of the China's credit rating has anxious the metal investors globally and domestically.

  • Zachary Reyes