Moody's downgrades China over surging debt fears

It was the first time Moody's has cut ratings for either place since November 1989, when China's economy was reeling following the bloody crackdown on democracy protesters in Beijing's Tiananmen Square.

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.

Moody's also forecast that China's growth potential will decline to about 5 per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown.

SHANGHAI Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings on Wednesday citing expectations that the financial strength of the world's second biggest economy would erode in the coming years. But China's Finance Ministry accused the agency of using "inappropriate methodology" that had resulted in the country's economic problems being overestimated, while underestimating the government's economic reform programme.

Chinese leaders have identified the containment of financial risks as a top priority this year, but are moving cautiously to avoid choking economic growth. The rating has been reduced by one level from A1 to Aa3 and they describe the outlook as "negative" meaning that a further downgrade is likely within two year.

China's total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160 per cent in 2008, according to Bloomberg Intelligence.

China's debt has been increasing lately by an amount equal to about 15% of the country's output each year, to keep the economy growing from 6.5% to 7%. The government has trimmed its 2017 growth target to around 6.5 percent after it expanded 6.7 percent in 2016, the slowest growth rate since 1990.

Though the new rating will likely modestly increase the cost of borrowing for the Chinese government, it remains within the investment grade rating range. However it did fret about slowing growth ahead and a likely rise in state debt.

In recent months authorities have moved to promote some level of transparency in the shadow banking sector that makes credit risk assessment harder in China, while the government has started the slow process of deleveraging non-profitable state-owned companies.

"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". Just over a year ago, Moody's lowered China's credit-rating outlook from stable to negative because of rising debt, falling currency reserves and uncertainty over the government's ability to carry out reforms.

  • Zachary Reyes