China defends economic policy after Moody's downgrade

Moody's Investor Services today announced a downgrading of China's credit rating to a negative A1 from a stable Aa3, the first time in almost 30 years, over concerns of weakening of the financial strength of the world's second-largest economy.

China's economy has for always been fuelled by economic stimulus and cheap credit and the government thereis now grappling with ways to steer the economy clear of a debt crisis as growth slows.

The cut to China's long-term local currency rating to A1 from Aa3 puts the country on a par with the Czech Republic, Estonia, Israel, Japan and Saudi Arabia.

Moody's said the downgrade on Hong Kong reflects its view that China's rising debt would have a significant impact on Hong Kong because of close ties between the two places.

ANZ, on the other hand, said, "Downgrade (s) by rating agencies could potentially erode the financial soundness of China, creating the risk of a negative feedback loop", and: "The downgrade will likely lift the cost of financing of Chinese issuers, especially in the offshore market".

The Finance Ministry of China said Moody's downgrade; the first for China by Moody's since 1989, was an overestimation of the risks to the Chinese economy and had been based upon an inappropriate methodology.

Communist leaders have cited reducing financial risk as a priority this year.

China defends economic policy after Moody's downgrade

Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.

The downgrading came amid a tightened national campaign in recent months to rein in financial risks and an upcoming key political meeting in the fall.

Zhu Chaoping, a China economist at UOB Kay Hian Holdings, told Fox Business that the downgrade will likely influence the Chinese exchange rate and weaken the ability for companies in the region to take out more debt or repay existing loans.

"None of the things that Moody's is talking about, right, has any merit outside the strict interpretation of a pure capitalist economy and China is not a purely capitalist economy". The move indicates a higher perceived risk associated with Chinese sovereign bonds and therefore, it could increase the cost of state borrowing in the worldwide money market.

Credit ratings agencies can be thought of as "bookies" to the financial investment community.

The government has trimmed its growth target for this year to about 6.5 percent after it expanded 6.7 percent last year, the slowest growth rate since 1990.

Moody's changed its outlook on China from stable to negative in March 2016. However it did fret about slowing growth ahead and a likely rise in state debt.

  • Zachary Reyes