China Downgraded by Moody's As Debt Increases

Shares of nine metal and mining companies fell by 0.68% to 3.36% at 14:10 IST on BSE after global credit rating agency, Moody's Investors Service cut China's sovereign credit rating for the first time in almost three decades.

China's credit rating has been downgraded by Moody's for the first time in nearly 30 years over fears that slowing growth and rising debts will weaken the world's second largest economy.

The agency's decision to "mechanically downgrade" Hong Kong's local currency and foreign currency issuer ratings by one notch shortly after a similar move on China is not correct, Paul Chan said, according to the Associated Press.

The move comes as China tries to clean up a toxic brew of unregulated and risky lending that has for years fueled the economy's spectacular growth, although some analysts doubt Beijing's willingness to quit its debt addiction.

Chinese leaders have identified the containment of financial risks as a top priority this year, but are moving cautiously to avoid choking economic growth. Moody's said it expects that the strength financially of the economy in China will erode during the next few years as its growth will slow and debut will continue rising.

"To a certain extent, [Moody's] overestimated the difficulties faced by China's economy, and underestimated the Chinese government's ability to deepen the supply-side structural reform and to moderately increase aggregate demand", it said in a statement (link in Chinese).

"In recent years, rating agencies have maintained India's BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance)", India's Chief Economic Advisor Arvind Subramanian said, PTI reported. But it's not the first time that global institutions have sounded alarm bells about China's rising debt levels. Worries are that China, now the second largest economy behind the U.S, can not thrive without the ability to continue export growth.

Commenting on the downgrade, PineBridge Investments co-head of Asia fixed income Arthur Lau said the decision was not a shock, given Moody's downgrade of China from "neutral" to "negative" in March.

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

It also expected contingent and indirect liabilities to rise due to the policy bank loans, bonds issued by Local Government Financing Vehicles and other state-owned enterprises' investments.

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

Moody's growth forecast for China, over the next five years.

  • Zachary Reyes