Moody's downgrades Hong Kong after China ratings cut

Moody's Investors Service cut China's sovereign credit rating for the first time in almost three decades, citing expectations that the country's financial strength will deteriorate in the coming years as debt keeps rising and the economy slows.

"The stable outlook reflects our assessment that, at the "A1" rating level, risks are balanced", Moody's said in its ratings note.

Moody's said China's financial strength was likely to erode as growth slows and debt rises further.

As a outcome, Moody's expects the government's direct debt burden to rise slowly towards 40% of GDP by 2018 and closer to 45% by the end of the decade, while other fiscal risks will rise from issues including high levels of off-book local government borrowing.

China's Finance Ministry today dismissed a credit downgrade by Moody's, saying it is based on "inappropriate methodology" and argued that the rating firm has overestimated the difficulties faced by the world's second largest economy.

Moody's Investor Service has downgraded China's credit ratings for the first time since 1989, Bloomberg reports, challenging the view that the nation's leadership will be able to rein in leverage while maintaining the pace of economic growth.

"The institutional features which grant Hong Kong, at present, a degree of political and economic independence together with the SAR's (Special Administrative Region) intrinsic credit strengths, allow Hong Kong's rating to exceed that of China".

The credit ratings, for local-currency and foreign-currency issuers, remains solidly in investment-grade territory.

"The planned reform program is likely to slow, but not prevent, the rise in leverage", Moody's said. Moody's expects growth to decelerate further over the next five years to close to 5%.

Authorities have stepped up efforts over the last several months to curb debt and housing risks, and a raft of recent data has signaled a cooling in the economy, which grew a solid 6.9 percent in the first quarter.

The downgrade has had "a negative psychological impact on the market", said Tian Weidong, strategist at Kaiyuan Securities, adding Beijing's campaign to clean up the financial system was already driving up market rates and causing retail investors to panic.

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.

It added that it expects government borrowing levels to increase.

  • Zachary Reyes