China Downgraded by Moody’s As Debt Increases
Moody’s Investors Service has downgraded the credit rating for China. The Wednesday downgrade was the first for China in close to 30 years. Moody’s said it expects that the strength financially of the economy in China will erode during the next few years as its growth will slow and debut will continue rising.
The downgrade of one-notch in long term foreign and local currency issuer ratings from Aa3 to A1 arrives at a time when the government of China is grappling with challenges from increased financial risks that stem from many years of stimulus that was credit fueled.
The downgrade is a reflection of the expectations by Moody’s that the financial strength of China’s economy will erode as debt mounts across the economy due to a potential for growth to slow, said the ratings agency in a prepared statement.
The Finance Ministry of China said Moody’s downgrade; the first for China by Moody’s since 1989, was an overestimation of the risks to the Chinese economy and had been based upon an inappropriate methodology.
Leaders in China have identified containing financial risks and its asset bubbles their top priority in 2017. In addition, authorities have moved cautiously to avoid knocking their economy growth, by gingerly increasing interest rates for the short-term while tightening their regulatory supervision.
Beijing must also deliver on its official targets for growth which will likely make the economy more reliant upon stimulus said Moody’s.
While the Moody’s downgrade will likely increase the borrowing cost modestly for the government of Beijing, and its enterprises that are state-owned, it is still comfortably within the investment grade range for its current rating.
After Moody’s made the downgrade, world stock moved slightly lower, though the main index in Shanghai recouped losses from early in the day to end slightly higher.
The yuan briefly dropped against the dollar in trading offshore, as did the dollar in Australia. The Australian dollar is often considered the proxy for risk in China.
In March of 2016, Moody’s lowered its outlook for China ratings from stable to negative, citing increasing debut and an uncertainty related to the ability of authorities to carry out needed reforms.
Standards & Poor’s, a rival of Moody’s, downgraded its outlook during the same month to negative for China. S&P’s AA- rating represent one notch above that of Moody’s as well as Fitch Ratings, leading to new speculation amongst analysts that a downgrade could be coming soon from S&P.