China's credit downgrade could 'reawaken risk'

David Cheetham, XTB, said: "The first downgrade to China from Moody's in nearly 30 years has caught the attention of traders this morning as the nearly forgotten narrative of a slowdown in economic activity in the Far East could be set to return".

Moody's said that the outlook for the country's financial strength will worsen, with debt rising and economic growth slowing.

The global ratings giant cut China from Aa3 to A1, equivalent to downgrade from AA- to A+ on the scales used by the other major agencies.

The downgrading of the China's credit rating has anxious the metal investors globally and domestically.

"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy- wide debt continuing to rise as potential growth slows", the credit rating agency said in a statement.

A ministry statement said the downgrade was based on a pro-cyclical approach which was "not appropriate". "The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus".

The downgrade is likely to modestly increase the cost of borrowing for China's government and SOEs, but it remains comfortably within the investment grade rating range.

Unsurprisingly, China's finance ministry didn't agree with the move. The negative view initially weighed on Asian markets, commodities and China's currency on Wednesday.

Moody's added that the reform programme is likely to slow rather than prevent increasing leverage.

However, ANZ's analysts warn that the downgrade could somewhat destabilise China's increasingly fragile financial markets.

The report said that the China's combined government, household, and non-financial corporate debt would balloon further from 256% of the nation's GDP.

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.

Marie Diron of Moody's Investors Service discusses China's rating cut.

"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", it said.

Moody's, the credit rating organisation, has downgraded China's credit rating for the first time in more than 25 years due to concerns over the slowing growth and rising debt of the Chinese economy. The index had also underperformed the market in past one quarter, dropping 6.59% as against Sensex's 5.1% rise.

Credit ratings agencies can be thought of as "bookies" to the financial investment community.

  • Zachary Reyes