China's credit rating downgraded amid fears over slowing economy

The move was announced hours after the firm downgraded China for the first time in nearly three decades citing concerns about its ballooning debt and slowing economic growth.

Moody's joined other observers in highlighting the risks of an overall debt pile that hit 256% of GDP at the end of a year ago, which it said signalled "an erosion" in China's credit profile.

The downgrade was based on the "pro-cyclical" rating approach which is "inappropriate", the Ministry of Finance (MOF) said.

Moody's Investors Service yesterday downgraded China's credit ratings yesterday for the first time in almost 30 years, citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as inappropriate.

Global stock markets traded in narrow ranges Wednesday, with investors brushing aside Moody's decision to cut China's debt rating.

Moody's warned China's financial strength will "erode somewhat" as growth slows and said its debt will continue to surge. But it increased its outlook from negative to stable, citing the government's cash reserves, meaning further downgrades were unlikely.

China's leaders have identified the containment of financial risks and asset bubbles as a top priority this year. "The planned reform programme is likely to slow, but not prevent, the rise in leverage", Moody's said in a statement here.

The agency lowered China's sovereign rating by one notch to A1 from Aa3, putting it in the same category as countries such as Japan and Israel. But, with an excessive leverage of the financial system, it would be hard for China to keep growth rates above the target of at least 6.5 per cent.

Moody's reduced the country's sovereign grade from Aa3 to A1 and changed the outlook from negative to stable.

Moody's expects economic growth to decline to close to 5% over the next five years.

Moody's expected Chinese government's direct debt burden to rise to 40 percent of its gross domestic production (GDP) in 2018 and edge closer to 45 percent in 2020.

Third, Moody's conclusion that rises in commercial bank loans, bonds issued by Local Government Financing Vehicles, as well as investments by State-owned enterprises will lead to increase in indirect and contingent liabilities.

This is likely to make the economy increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, it added. 'A psychological blow'Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, described the downgrade as "a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures".

  • Zachary Reyes