Moody's downgrades China's sovereign credit rating

Remigio Civitarese
Mag 24, 2017

Moody's reduced the rating to A1 from Aa3 and changed the outlook to stable from negative, the company said in a statement on Wednesday (May 24).

CHINESE DEBT: Moody's Investors Service downgraded the Chinese government's rating for long-term local currency and foreign currency debt, citing China's overall rising debt.

The Chinese finance ministry dismissed the credit downgrade in a statement, saying that Moody's was overestimating threats to its economic growth.

Moody's said that China's financial strength could be diminished in years to come as rising debt continues to drag on its prospects. Growth hit 10.6 percent in 2010 before sliding to a near-three decade low of 6.7 percent previous year. S&P's AA- rating is one notch above both Moody's and Fitch Ratings, leading to speculation among analysts that S&P could also downgrade soon.

China's economy started strongly in 2017. The economy - which is now growing at its slowest pace in a quarter-century - is a sensitive topic in one-party China, where the Communist Party touts its management record in order to preserve control.

The Chinese economy expanded by 6.7 per cent in 2016 compared with 6.9 per cent in 2015, the slowest growth since 1990.

World stocks inched lower on Wednesday after China's sovereign credit rating was downgraded and as investors eyed a pause in Wall Street's four-day winning streak, the longest in over three months.

There have also been concerns about the levels of debt building up in the private sector, particularly among the banks, which have lent money to businesses that, in some cases, they are unlikely to be repaid.

Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of its GDP.

"US Treasury yields had a small sell-off at the start of the NY session, with the move higher in yields helping the dollar perform across the board", National Australia Bank Currency Strategist Rodrigo Catril said in a Wednesday note.

As China's central bank has shifted to a prudent and neutral monetary policy, it will likely be more careful in balancing its multiple goals. They will likely turn on onshore financing platforms, including banks, shadow banks and onshore bond markets as these channels do pay less attention to rating actions of worldwide agencies. "Though a hike is not a done deal, it is still widely expected", Imaizumi said.

"It's reached the point where the bad debt problem is just so large the government will have to step in to resolve it at some point, and that obviously means at some point a sizable increase in government debt", he said.

The ministry also refuted Moody's expectation that China's government debt-to-GDP ratio would rise to 40 percent in 2018.

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