Moody's Downgrades China's Rating

The worldwide rating agency announced Wednesday that it was downgrading the Middle Kingdom's long-term local currency and foreign currency issuer ratings one notch, to A1 from Aa3.

However, the agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong.

The ratings agency said its decision was based on its expectation that "China's financial strength will erode somewhat over the coming years" as debt continues to widen and potential growth shrinks.

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. In March of past year, it cut China's outlook to negative from stable. China's benchmark 10-year government bond yields rose to a near two-year high of 3.68% while China's currency, the yuan, slipped around 0.1% against the US dollar.

Global financial research and investor service provider, Moody, downgraded China's credit rating from A1 to Aa3. This means the country has a debt ratio of 36.7 percent, which is much lower than the European Union's 60 percent warning level, as well as the debt ratio of other major and emerging economies.

Fundamentally, the question boils down to how well China can cope with its existing debt burden which is estimated to be 2.6 times the nation's GDP. "But S&P now rates China one notch above Moody's and Fitch, so a cut would not break new ground".

"Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile which is best reflected now in an A1 rating".

China grew 6.7 per cent past year down from 6.9 per cent in 2015 - the slowest growth since 1990.

While China's leaders acknowledge the necessity for effectively containing financial risks and asset bubbles, financial authorities wary of knocking economic growth, are not ready to raise short-term interest rates and tighten regulation.

The move brings Moody's in line with rival Fitch, which has had an equivalent A+ rating on China since November 2007.

Chinese economic growth fell from 14.2 percent in 2007 to 6.7 percent a year ago, though that still was among the world's strongest.

How's China doing in tackling its growing debt problem? The downgrade could raise the cost of borrowing for the Chinese government.

Jason Hollands: How chicken should you be about China in the Year of the Rooster? Past year the Chinese economy grew by 6.7% - the weakest since 1990.

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic".

  • Zachary Reyes