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China's credit rating downgraded amid fears over slowing economy
30 May 2017, 06:28 | Ignacio Smith
Chinese protesters in Beijing China. Guang Niu Getty Images
Moody's one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fueled stimulus.
The rating agency attributed the decision to expectations that China's economy-wide leverage would increase over the coming years, planned reform program would likely slow, but not prevent the rise in leverage, and sustained policy stimulus would cause rising debt. The ratings agency also changed its outlook for China to stable from negative.
By downgrading China's credit rating, Moody's said China's debt is likely to grow substantially, while its economy slows down.
However, it's not government debt that's concerning economists, but rather the amount of debt level of China's "state-owned enterprises" (SOEs) and debt carried by the country's local governments. While Beijing did acknowledge that it has built up a lot of debt, the Chinese government said it is confident that it can contain those risks. Beijing rejects Moody's opinion that financial growth may fade with the finance ministry accusing Moody's of exaggerating economic difficulties and underestimating reforms.
On the debt front, China's total and private debt is reported to be worth more than 250 per cent of GDP. It also cited the likelihood of a "material rise" in economy-wide debt and the burden that will place on the state's finances, while also changing the outlook to stable from negative.
"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".
China's growth previous year, down from 6.9 per cent in 2015 - the slowest growth since 1990.
China's central bank has raised short-term interest rates twice this year, raising the costs for speculators betting against the yuan.
It last downgraded the country in 1989.
"Moody's has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has", Financial Secretary Paul Chansaid in a statement. Fitch's current rating for the country, A+, is its fifth-highest.
ANZ said it sees a marginal negative influence from the downgrade on the domestic bond market as local investors are not sensitive to worldwide credit ratings, according to a report released yesterday.
The Chinese economy expanded by 6.7 per cent in 2016 compared with a peak of 10.6 per cent in 2010.
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