Moody's downgrades China, warns of fading financial strength as debt stings

The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows, Moody's said

Reuters May 24, 2017 10:19:01 IST
Moody's downgrades China, warns of fading financial strength as debt stings

Moody's Investors Services downgraded China's long-term local and foreign currency issuer ratings on Wednesday, citing expectations that the financial strength of the world's second-biggest economy would erode in the coming years.

The downgrade by one notch to an A1 rating from Aa3 comes as the Chinese government grapples with the challenges of slowing economic growth and rising financial risks stemming from soaring debt.

"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows," Moody's said in a statement.

"While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government," it said.

The ratings agency also changed its outlook for China to stable from negative.

China's top leadership has identified the containment of financial risks and asset bubbles as a top priority this year. All the same, authorities have moved cautiously to avoid knocking economic growth, gingerly raising short-term interest rates.

Moodys downgrades China warns of fading financial strength as debt stings

Reuters

While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises, it remains comfortably within the investment grade rating range.

China's Shanghai Composite index fell more than 1 percent in early trade, while the yuan currency in the offshore market briefly dipped nearly 0.1 percent against the U.S. dollar after the ratings agency announced its decision. The Australian dollar, often see as a liquid proxy for China risk, also slipped.

"It's quite clear that it’s going to be quite negative in terms of sentiment, particularly at a time when China is looking to derisk the banking system, as well as at a time when there’s going to be some potential restructuring of SOEs," said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank's Treasury division.

Growth to slow

In March 2016, Moody's cut its outlook on China's government credit ratings to negative from stable, citing rising debt and uncertainty about the authorities' ability to carry out reforms and address economic imbalances. Rival ratings agency Standard & Poor's downgraded its outlook to negative in the same month. S&P's AA- rating is one notch above both Moody's and Fitch Ratings' A+ rating.

Moody's said its now stable outlook reflected the assessment that risks were balanced.

China's potential gross domestic product growth was likely to slow toward 5 percent in the coming years, but the slowdown is likely to be gradual due to expected fiscal stimulus, it said.

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

Government-led stimulus has been a major driver of economic growth over recent years, but the pump-priming has also been accompanied by runaway credit growth and has created a mountain of debt - now standing at nearly 300 percent of GDP.

Moody's said it expects the government's direct debt burden to rise gradually toward 40 percent of GDP by 2018 "and closer to 45 percent by the end of the decade".

Economy-wide debt of the government, households and non-financial corporates would also continue to rise, it said.

"Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signaling an erosion of China's credit profile which is best reflected now in an A1 rating," it said.

Updated Date:

Find latest and upcoming tech gadgets online on Tech2 Gadgets. Get technology news, gadgets reviews & ratings. Popular gadgets including laptop, tablet and mobile specifications, features, prices, comparison.

also read

Qatar puts up 'for sale' sign with new property visas, offers permanent residency with $1mn purchase
World

Qatar puts up 'for sale' sign with new property visas, offers permanent residency with $1mn purchase

Foreigners can now house hunt in 25 areas of Qatar — mostly in and around the capital Doha — nine on a freehold basis and the rest with 99-year leaseholds

FM Nirmala Sitharaman Press Conference Updates: EPFO subsidy, tax relief for home buyers among 12 measures in Stimulus 2.0
Business

FM Nirmala Sitharaman Press Conference Updates: EPFO subsidy, tax relief for home buyers among 12 measures in Stimulus 2.0

FM Nirmala Sitharaman Press Conference LATEST Updates: Nirmala Sitharaman said at the presser an additional outlay of Rs 10,000 has been announced for the PM Garib Kalyan Rozgar Yojana. She said that Rs 73,504 crore has already been spent from the current outlay of Rs 1 lakh crore

Indian economy witnessing strong recovery, says Nirmala Sitharaman; announces stimulus measures
Business

Indian economy witnessing strong recovery, says Nirmala Sitharaman; announces stimulus measures

Energy consumption growth trended higher in October at 12 percent year-on-year, said the finance minister