Moody's downgrades China's credit rating citing concerns over its growing debt

Previous year the Chinese economy grew by 6.7% - the weakest since 1990. China's short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1), it said.

But Moody's said it expects China's growth potential to decline to close to 5 per cent over the next five years, citing diminishing investment, an accelerated fall in the working age population and a continuing dip in productivity.

China's Finance Ministry said on Wednesday the downgrade overestimated the risks to the economy and was based on "inappropriate methodology". The government is trying to make the economy more productive by giving market forces a bigger role and through "supply side reform", or shrinking bloated industries such as steel and cement in which supply exceeds demand, which has depressed prices and led to financial losses.

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.

On the debt front, China's total and private debt is reported to be worth more than 250 per cent of GDP. "The direct impact is that this would make China's debt financing more hard and the financing cost would also rise". Broadly, China's commercial sector has a lower rating than the government. The country has for years been pumping credit-fueled stimulus as part of efforts to achieve growth internally rather than relying on exports, but this has raised fears about China's rising debt levels.

The Hang Seng index ended up 0.1 percent at 25,428.50 points, while the China Enterprises Index was unchanged at 10,390.87.

"However, the timing of the rating reduction has taken the market by surprise, and we believe that S&P may follow suit", Mr Lau said. "Still, progress remains faltering and in some respects, movement is in the wrong direction".

Despite the concerns raised by India, Moody's in November 2016 went on affirming India's BAA3 rating with a positive outlook, ignoring Economic Affairs Secretary Shaktikanta Das' arguments of "stable external debt parameters and the slew of reforms introduced in the realm of foreign direct investment".

The stable outlook reflects Moody's assessment that, at the A1 rating level, risks are balanced.

Moody's said any weakening of mainland China's creditworthiness "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". Beijing has responded by flooding the economy with credit.

  • Zachary Reyes