Moody's downgrades China's credit rating

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.

The news of the downgrade in China's long term local currency rating - one notch to an A1 rating from AA3 saw Chinese stockmarkets sell off by 1% for a while before they recovered, while the Australian dollar dropped by around 0.3% before steadying to trade around 74.50 United States cents.

The news triggered an early selloff in Chinese stocks, with shares in Shanghai falling more than 1% before recovering, in addition to modest losses for the Chinese currency in the freely traded offshore market.

Moody's Investors Service yesterday slashed China's credit rating for the first time in nearly three decades, citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate".

The ministry said the Chinese government's liability ratio stood at 36.7 percent to GDP by the end of previous year, compared to the European Union's 60 percent and far below the level of other major economies and emerging markets.

China's finance ministry responded that Moody's downgrade is "inappropriate" because it's based exclusively on economic fluctuations.

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.

The downgrade is likely to modestly increase the cost of borrowing for China's government and SOEs, but it remains comfortably within the investment grade rating range.

China is now trying to bring debt under control, especially in what is called "shadow banking" which seems to be helping finance the intensifying speculation in commodities (such as iron ore, gold and copper).

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

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

The downgrade reflects the rating agency's expectation that "China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows", it said in a statement.

Gross domestic product grew 6.9 percent in the first quarter, above the full-year target of 6.5 percent and the 6.8-percent growth in the fourth quarter of 2016.

"Moody's made a wrong hypothesis to mix corporate and government debts, which is an obvious misreading", said Qiao Baoyun, an economist with Central University of Finance and Economics.

"In recent years, rating agencies have maintained India's BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance)", India's Chief Economic Advisor Arvind Subramanian said, PTI reported.

"Moody's point of view shows that some worldwide institutions lack the necessary understanding of our legal system", said the statement.

  • Zachary Reyes