China's credit rating downgraded for first time since 1989

The move came hours after the agency cut China's rating, saying the nation's financial strength is likely to erode due to slower growth and rising debt risks.

Moody's on May 24 slashed China's credit rating for the first time in nearly three decades citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate".

At the same time, Beijing's need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus, Moody's said.

However, it's not government debt that's concerning economists, but rather the amount of debt level of China's "state-owned enterprises" (SOEs) and debt carried by the country's local governments.

Moody's cut Hong Kong from Aa1 to Aa2 but upped its outlook from negative to stable.

The ministry stated that it is rejecting Moody's decision to downgrade its credit rating, claiming that the organization used an "inappropriate" method to assess the risks facing the world's number two economy.

The government's direct debt burden, which is now at a modest level of less than 40% of GDP, is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%). Growth hit 10.6 percent in 2010 before sliding to a near-three decade low of 6.7 percent past year.

China's economy grew at the rate of 6.7 per cent in 2016, as compared with 6.9 per cent in the previous year.

China's credit rating downgraded for first time since 1989

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.

Moody's growth forecast for China, over the next five years.

Shanghai shares pulled back from initial sell-offs following the decision, with the Shanghai Composite Index closing 0.07 percent higher, shrugging off a 1.3 percent drop earlier in the day.

"The institutional features which grant Hong Kong, at present, a degree of political and economic independence together with the SAR's (Special Administrative Region) intrinsic credit strengths, allow Hong Kong's rating to exceed that of China". Moody's also changed its outlook on China from "stable" to "negative".

China has balked at the downgrade.

The state planner, the National Development and Reform Commission, added in a statement that China's debt risks are generally controllable as measures to lower corporate leverage have achieved initial results, and systemic risks from debt are relatively low.

It added the ratings company was exaggerating the mainland's economic difficulties. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

  • Zachary Reyes