Moody's downgrades Hong Kong after China ratings cut

Cornelia Mascio
Mag 25, 2017

According to China's Finance Ministry, "Our GDP will keep medium- and high-level growth and that will provide fundamental support to fend off local government debt risks", and "China's government debt risks will not change dramatically in the period of 2018-20 from 2016". Credit rating agency Moody's has cut its credit rating for China on Wednesday, May 24, 2017, citing slowing economic growth and rising debt that it says will erode the country's financial strength. China's 13th Five-Year-Plan, released last year, announced an average annual growth rate of above 6.5 per cent for 2016-2020.

Aviva Investors' head of emerging markets and Asia Pacific equities Will Ballard said: "Moody's downgrade of China's sovereign debt rating today should come as little surprise to investors".

The government has trimmed this year's growth target to around 6.5 per cent after it expanded 6.7 per cent last year, the slowest growth rate since 1990.

Moody's also claimed that increases in China's local government financing platforms and debt owed by SOEs would lead to rising government contingent liabilities.

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. The erosion in China's credit profile will be gradual and, it expects, eventually contained as reforms deepen. Experts inside and outside China believe Beijing probably has the power to stop a meltdown of the kind that slammed the United States and much of the rest of the world a decade ago, thanks to the Chinese government's considerable financial firepower, minimal foreign debt, ample foreign reserves and ironclad grip on the country's banking system.

Hong Kong's ratings downgrade had a similarly subdued effect on investors.

Communist leaders have cited reducing financial risk as a priority this year.

However, China's Finance Ministry said the downgrade overestimated the risks to the economy and was based on "inappropriate methodology".

In an anticipated move, the credit rating agency cut China's sovereign credit rating for the first time since 1989, taking it to A1 from Aa3, on concerns the country's increasing debt levels and stalling growth will be detrimental to China's financial strength. And can it do that whilst trying to maintain strong economic growth figures?

China's debt problems stem from the global financial crisis, which began in 2008.

It said the government's debt ratio a year ago was 36.7 per cent, lower than major market economies, and that the "expansion of the scale of government debt has been effectively controlled".

China's authorities dismissed the ratings cut, saying Moody's was exaggerating the country's economic difficulties and underestimating reform efforts. Beijing has responded by flooding the economy with credit.

It added that it expects government borrowing levels to increase.

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