China hit with first credit rating downgrade in over 25 years

Marcus Newton
May 27, 2017

Moody's decision came as China tries to clean up a toxic brew of unregulated and risky lending that for years has fuelled the economy's spectacular growth, though some analysts doubt Beijing's willingness to quit its debt addiction.

Earlier on April 9, 2013, Fitch Ratings downgraded China's long-term local currency rating to A+ from AA-, the first sovereign rating cut since 1999.

China has reacted angrily to Moody's downgrade of the country's credit rating from double-A-3 to A-1.

The ministry stated that it is rejecting Moody's decision to downgrade its credit rating, claiming that the organization used an "inappropriate" method to assess the risks facing the world's number two economy. "China will continue the process of financial deleveraging while preventing systemic financial risks as the nation has pledged to stick to the basic tone of "seeking progress while maintaining stability" this year", Scotiabank commented in its latest research report.

China is now trying to bring debt under control, especially in what is called "shadow banking" which seems to be helping finance the intensifying speculation in commodities (such as iron ore, gold and copper). "The direct impact is that this would make China's debt financing more hard and the financing cost would also rise". 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. "It overestimated the difficulties faced by China and underestimated its ability to deepen structural reform and moderately expand overall demand", the ministry said.

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"The downgrade will certainly affect China negatively", Liao Qun, Hong Kong-based chief economist of Citic Bank International, told AFP. Broadly, China's commercial sector has a lower rating than the government.

Authorities have stepped up efforts over the last several months to curb debt and housing risks, and a raft of recent data has signalled a cooling in the economy, which grew a solid 6.9 per cent in the first quarter.

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.

"The institutional features which grant Hong Kong, at present, a degree of political and economic independence - together with the SAR's intrinsic credit strengths - allow Hong Kong's rating to exceed that of China". Higher debt levels usually mean a higher level of risk. Equities there sold off briefly following the China downgrade, but the impact was largely been confined to the Australian dollar, which fell some 0.5% against major currencies in Asian trading.

Other reports by MaliBehiribAe

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