Moody's downgrades Hong Kong credit rating after China cut

Moody's has cut its credit rating for Hong Kong hours after downgrading China for rising debt levels, which it said would have "significant impact" on the Asian financial hub due to their close links. Following the downgrade, China's five-year credit default swaps widened only 2bps while the CNY weakened 0.5 per cent against the United States dollars.

China's rating outlook has been moved from negative up to stable by Moody's following the downgrade.

The Australian dollar is weaker as the first ratings downgrade on China by Moody's since 1989 renewed concerns about the economic strength of Australia's key trading partner.

The Chinese government had made solid progress in "Belt and Road" construction, while reform in state-owned enterprises, finance and taxation continued to deepen, it said.

"Moody's views that China's non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy", the statement read.

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.

"Rising debt will erode China's credit metrics, with robust growth increasingly reliant on policy stimulus", Moody's said.

Western institutions and media reports have since past year repeatedly referred to China's credit risks. But private sector analysts say they are moving too slowly.

China's debt problems stem from the global financial crisis, which began in 2008.

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

According to a Reuters report from December 2016, India "had criticised Moody's ratings methods and pushed aggressively for an upgrade". "Our estimates show that China's overall debt ratio will not reach 40 percent because China has imposed strict restrictions on government debt issuance", he said. Beijing has responded by flooding the economy with credit. "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 economywide debt, and the consequent increase in contingent liabilities for the government".

Chinese authorities had been trying to shift away from debt-funded property and infrastructure investment as the key drivers of economic growth towards a more consumer-focused economy.

  • Zachary Reyes