Moody's lowers China credit rating as growth slows

Responding to Moody's assessment, the Chinese ministry of finance said the downgrade had been based on "inappropriate methodology" that exaggerated the country's economic difficulties, underestimated the potential of its reforms and evidenced a "lack of necessary understanding" of the country's budget laws.

Moody's said it expects the financial strength of China's economy will weaken in the years ahead as growth slows and debt continues to rise.

Worldwide 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.

Moody's said that China's growth rate will slow to 5% in the coming years, although at a gradual pace thanks to the expected government fiscal stimulus.

China's local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3.

Leaders in China have identified containing financial risks and its asset bubbles their top priority in 2017.

Estimates of China's total non-government debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent previous year.

Moody's says it expects China's central government debt to rise to 40 per cent of GDP by the end of 2018, before reaching 45 per cent by 2020.

The move indicates a higher perceived risk associated with Chinese sovereign bonds and therefore, it could increase the cost of state borrowing in the global money market.

But the Chinese finance ministry hit back at the Moody's decision, claiming it gave a false picture of China's financial outlook.

The Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990.

China's GDP rose 6.9% in the first quarter, slightly beating market expectations.

The move comes as China tries to clean up a toxic brew of unregulated and risky lending that has for years fueled the economy's spectacular growth, although some analysts doubt Beijing's willingness to quit its debt addiction.

The agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong.

Two other major credit ratings agencies - Standard & Poor's and Fitch - have also refused to budge on India's concerns.

Peter Rosenstreich, Swissquote Bank, commented: "While the credit rating cuts failed to hurt China's stock markets, AUD headed lower following industrial commodities weakness and risk in China".

The downgrade nevertheless serves as an global warning on the "China risk" at the time when Beijing is opening its onshore bond market to foreign investors and striving to have A-shares included in the MSCI and other worldwide market indices.

  • Zachary Reyes