Markets

Moody's cuts China credit rating over rising debt

Moody's cuts China credit rating over rising debt

Justifying the move, Moody's commented that Chinese financial strength would: "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows".

The decision by Moody's Investors Service to downgrade China's credit rating is "illogical" and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper on Thursday.

Chinese economic growth has slowed significantly over the past years, from double digit GDP growth of 10.6% in 2010 to 6.7% in 2016 - the weakest level growth since 1990.

China's economic growth may face more headwinds in the second half, sparking risk aversion at some point late this year. Moody's expects growth to decelerate further over the next five years to close to 5%.

The ministry said the Chinese government's liability ratio stood at 36.7 percent to GDP by the end of previous year, compared to the European Union's 60 percent and far below the level of other major economies and emerging markets.

The downgrade will have an impact on the cost of borrowing for China's government and its SOEs.

After the downgrade, Moody's said it doesn't plan to move China's rating lower than A1, which is still investment grade, anytime soon. "This is like throwing cold water when everyone is optimistic about China's economy".




Brokerage CICC estimated that mainland money flows into Hong Kong stocks would average 200-400 billion yuan ($29 billion to $ 58 billion) over the next few years, or 1-2 billion yuan each trading day, according to China Securities Journal.

Moody's cut China's rating from Aa3 to A1 while changing its outlook to stable from negative, citing concerns over rising debt and potential growth slowing. The outlook was raised to stable from negative.

"Evidence that structural reforms are effectively stemming the rise in leverage without an increase in risks in the banking and shadow banking sectors could be positive for China's credit profile and rating", explains the agency. Beijing has responded by flooding the economy with credit. Fears are mounting that China is flirting with a potential disaster worse than the US sub-prime collapse that sparked the global financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade".

"In particular, China's recent regulatory tightening should help deflate the country's credit markets and lead to long-term market stabilisation".

Moody's has no specific timetable for re-visiting China's rating, but would monitor conditions on a regular basis, said Marie Diron, associate managing director of Moody's Sovereign Risk Group.

Schroders emerging market economist Craig Botham agreed that markets had already taken stock of China's leverage to growth ratio, mitigating some of the immediate negative reactions from the ratings announcement. Meanwhile, Hong Kong's Hang Seng index was down slightly by 0.1%.


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