China's credit rating downgraded by Moody's from Aa3 to A1

The Chinese yuan slipped against the USA dollar today (though it has trimmed the losses by now) after Moody's Investor Service made a surprise cut of China's credit rating for the first time in nearly three decades.

"Moody's expects that economy-wide leverage will increase further over the coming years", it said, adding that China's reform program was is likely to slow, but not prevent, the rise in leverage.

The credit agency slashed Hong Kong's local currency and foreign currency issuer rating from Aa1 to Aa2.

The last time Moody's cut China's credit rating was 1989, the same year as the Tiananmen Square protests.

Credit rating agency Moody's has cut its credit rating for China, Wednesday, May 24, 2017, citing slowing economic growth and rising debt that it says will erode the country's financial strength.

"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.

Beijing must also deliver on its official targets for growth which will likely make the economy more reliant upon stimulus said Moody's.

Moody's also cut the rating of 26 state-owned enterprises by one notch, shortly after the main sovereign downgrade.

"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".

While acknowledging China's efforts to rebalance its economy away from reliance on debt-fuelled stimulus, Moody's obviously believes progress has been too slow to arrest deterioration in its financial strength.

"The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced", it said in its ratings note.

However, Moody's added that reforms implemented by the Chinese government would likely curb some of the negative effects from rising debt.

"The downgrade will certainly affect China negatively", Citic Bank International (中信銀行國際) Hong Kong-based chief economist Liao Qun (廖群) said.

At the same time, private debt from households and businesses is also on the rise.

"President Xi Jinping has already called for increased action from the government to control financial risks and improve co-ordination between the various regulatory authorities". Broadly, China's commercial sector has a lower rating than the government. Moody's now rates China's credit alongside that of countries such as Japan, Saudi Arabia and Israel.

China's financial markets were shaken by the move but quickly brushed it off. Stocks, bonds and the currency were little changed.

  • Zachary Reyes