China's Credit Rating Down After 30yrs

The country has for years been pumping credit-fueled stimulus as part of efforts to achieve growth internally rather than relying on exports, but this has raised fears about China's rising debt levels.

The cut to China's long-term local currency rating puts the country on par with Czech Republic, Estonia, Israel, Japan and Saudi Arabia and one level below other sovereign borrowers, including Taiwan and Macau, and one notch above the likes of Bermuda, Botswana, Poland and Slovakia. The move marks the first downgrade of China's debt by Moody's since 1989, according to Bloomberg.

China's Finance Ministry said on Wednesday the downgrade overestimated the risks to the economy and was based on "inappropriate methodology".

Leaders in China have identified containing financial risks and its asset bubbles their top priority in 2017.

China's debt-to-GDP ratio is more than 250 per cent, one of the highest in the world, "reflecting attempts by Beijing to continue pump-priming its economy and maintain growth and job creation as millions move from the countryside to make their fortunes in the cities", says Sky News.

The downgrade adds to concerns over China's reliance on credit to propel growth since the 2008 global crisis. However, Moody's upgraded its outlook to stable from negative, where it had been since last March.

Moody's further contended that "a resolution to the banking sector's bad loan problems was "unlikely" in the near-term", the report said.

China's Shanghai Composite index fell more than one percent in early trade before paring losses, while the yuan currency in the offshore market briefly dipped almost 0.1 percent against the USA dollar after the news. According to China's Finance Ministry, "Our GDP will keep medium- and high-level growth and that will provide fundamental support to fend off local government debt risks", and "China's government debt risks will not change dramatically in the period of 2018-20 from 2016".

China's sovereign debt is mostly held by domestic investors, which shields the economy from the sudden impact of ratings changes.

While the Moody's downgrade will likely increase the borrowing cost modestly for the government of Beijing, and its enterprises that are state-owned, it is still comfortably within the investment grade range for its current rating. It said that while planned reforms will transform the economy and financial system, they will not prevent an increase in debt and potential government liabilities.

China's economic growth may face more headwinds in the second half, sparking risk aversion at some point late this year. S&P has had China on outlook negative since February 2016, indicating there is a potential downgrade brewing.

  • Zachary Reyes