Moody’s said that it expects the financial strength of the Chinese economy will erode in coming years as growth slows and debt continues to rise as the ratings agency - Moody's Investors Service downgraded China's credit ratings for the first time in nearly 30 years.
Even as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fueled stimulus, the long-term local and foreign currency issuer ratings was downngraded one-notch to A1 from Aa3.
"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," the ratings agency said in a statement, changing its outlook for China to stable from negative.
The downgrade was based on "inappropriate methodology" and overestimated the risks to the economy, said the China's Finance Ministry about Moody's first for the country since 1989.
“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.
A top priority this year for the economy is the containment of financial risks and asset bubbles, as identified by China's leaders. All the same, gingerly raising short-term interest rates while tightening regulatory supervision, the authorities are moving cautiously to avoid knocking economic growth.
Moody’s said that the economy is likely to be increasingly reliant on stimulus by Beijing's need to deliver on official growth targets.
"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.
However, China remains comfortably within the investment grade rating range even though the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs).
Though Shanghai's main index recouped early losses to end marginally higher, world stocks inched lower after the move.
"After being very much at the front and center of global risk sentiment at the beginning of last year, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the U.S. taking the limelight," said David Cheetham, chief market analyst at brokerage XTB.
"It's going to be quite negative in terms of sentiment, particularly at a time when China is looking to de-risk the banking system (and) 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.
Citing rising debt and uncertainty about authorities' ability to carry out reforms, Moody's cut its outlook on China's ratings to negative from stable in March 2016.
In the same month, the outlook to negative was downgraded to negative by rival ratings agency Standard & Poor's. Now there are speculations among analysts that S&P could also downgrade soon because S&P's AA- rating is one notch above both Moody's and Fitch Ratings.
"We understand the risk and the reason for downgrade, but due to China being a unique system – (with a) closed capital account and strong government control over all important sectors - it can tolerate a higher debt level," said Edmund Goh, a Kuala Lumpur-based investment manager at Aberdeen Asset Management.
(Source:www.reuters.com)
Even as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fueled stimulus, the long-term local and foreign currency issuer ratings was downngraded one-notch to A1 from Aa3.
"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," the ratings agency said in a statement, changing its outlook for China to stable from negative.
The downgrade was based on "inappropriate methodology" and overestimated the risks to the economy, said the China's Finance Ministry about Moody's first for the country since 1989.
“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.
A top priority this year for the economy is the containment of financial risks and asset bubbles, as identified by China's leaders. All the same, gingerly raising short-term interest rates while tightening regulatory supervision, the authorities are moving cautiously to avoid knocking economic growth.
Moody’s said that the economy is likely to be increasingly reliant on stimulus by Beijing's need to deliver on official growth targets.
"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.
However, China remains comfortably within the investment grade rating range even though the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs).
Though Shanghai's main index recouped early losses to end marginally higher, world stocks inched lower after the move.
"After being very much at the front and center of global risk sentiment at the beginning of last year, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the U.S. taking the limelight," said David Cheetham, chief market analyst at brokerage XTB.
"It's going to be quite negative in terms of sentiment, particularly at a time when China is looking to de-risk the banking system (and) 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.
Citing rising debt and uncertainty about authorities' ability to carry out reforms, Moody's cut its outlook on China's ratings to negative from stable in March 2016.
In the same month, the outlook to negative was downgraded to negative by rival ratings agency Standard & Poor's. Now there are speculations among analysts that S&P could also downgrade soon because S&P's AA- rating is one notch above both Moody's and Fitch Ratings.
"We understand the risk and the reason for downgrade, but due to China being a unique system – (with a) closed capital account and strong government control over all important sectors - it can tolerate a higher debt level," said Edmund Goh, a Kuala Lumpur-based investment manager at Aberdeen Asset Management.
(Source:www.reuters.com)
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