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Moody's downgrade China's credit rating amid fears of slowing economic growth

Moody's downgrade China's credit rating amid fears of slowing economic growth”

Second, Moody's estimation that relevant reforms in China may not be effective and that the Chinese economy will continue to slow underestimates the Chinese government's ability to deepen supply-side structural reform and moderately expand domestic demand.

Moody's said China's financial strength was likely to erode as growth slows and debt rises further.

It also expected contingent and indirect liabilities to rise due to the policy bank loans, bonds issued by Local Government Financing Vehicles and other state-owned enterprises' investments.

However observes believe runaway credit has accumulated to such an extent that these measures will be insufficient and the government will have to step in, leading to a leap in public debt levels.

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Hong Kong's participation in China's Belt and Road initiative brings the economy and financial systems closer together, Moody's also said.

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

Estimates of China's total nongovernment debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent a year ago. In each case, Moody's changed the outlook to stable from negative, and in each case, the rating is solidly investment grade.

Communist leaders have cited reducing financial risk as a priority this year. The finance ministry noted the growth rate ticked up to 6.9 percent in the quarter ending in March and said tax revenue rose 11.8 percent in the first four months of the year.

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Global banking and financial advisory provider Macquarie, "This news is a clear China negative in our view (even though the rationale for the downgrade contained nothing new)", and "The next question is whether S&P will follow Moody's". However it did fret about slowing growth ahead and a likely rise in state debt. Fitch's current rating for the country, A+, is its fifth-highest.

China has balked at the downgrade.

The firm trimmed its rating for the country's sovereign debt by one notch from A1 to Aa3 - a move that could make borrowing more expensive for China and one that has been rejected by the country's finance ministry. But, with an excessive leverage of the financial system, it would be hard for China to keep growth rates above the target of at least 6.5 per cent.

"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".

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