China dismisses Moody's downgrade as "inappropriate"

But the country's economy has picked up since the second half of 2016, with its GDP growth reaching 6.9 per cent in the first quarter of this year.

Moody's cut their rating on the country by one notch, from A1 to Aa3.

David Cheetham, XTB, said: "The first downgrade to China from Moody's in nearly 30 years has caught the attention of traders this morning as the nearly forgotten narrative of a slowdown in economic activity in the Far East could be set to return".

The downgrade is a reflection of the expectations by Moody's that the financial strength of China's economy will erode as debt mounts across the economy due to a potential for growth to slow, said the ratings agency in a prepared statement.

It said in a statement that the downgrade - the agency's first for the country since 1989 - overestimated the risks to the economy, underestimated Beijing's industrial reform and financial strength and was based on "inappropriate methodology".

However, it highlighted that official growth targets are likely to fall at a more gradual pace, given the importance the Chinese government attaches to them, "rendering the economy increasingly reliant on policy stimulus".

This follows Moody's decision to downgrade China's sovereign rating to A1 from Aa3 and change the outlook to stable from negative, as announced on May 24, 2017.

China's sovereign debt is mostly held by domestic investors, which shields the economy from the sudden impact of ratings changes.

The MOF pointed out another error in Moody's credit rating criteria as it mingled government debt with local government financing platforms and debt of State-owned enterprises. However it did fret about slowing growth ahead and a likely rise in state debt.

Commenting on the downgrade, PineBridge Investments co-head of Asia fixed income Arthur Lau said the decision was not a shock, given Moody's downgrade of China from "neutral" to "negative" in March. The Chinese credit profile, for example, is expected to weaken, but the damage is an obstacle that China can overcome in time.

Schroders emerging market economist Craig Botham warns the attempts by China's authorities to tighten policy have contributed to significant moves in bond yields, which highlights how hard it will be for the Chinese government to deal with the debt issue.

Moody's further contended that "a resolution to the banking sector's bad loan problems was "unlikely" in the near-term", the report said.

"Our projections show that China would still be able to maintain (a growth rate) of around 6 per cent by 2020", he noted.

  • Zachary Reyes