Via The Guardian : Moody’s lowers country’s rating for first time since 1989 to reflect concerns over rising debt
China’s credit rating has been downgraded by Moody’s for the first time in almost 30 years over fears that slowing growth and rising debts will weaken the world’s second largest economy.
The agency lowered China’s sovereign rating by one notch to A1 from Aa3, putting it in the same category as countries such as Japan and Israel. The outlook was raised to stable from negative.
Moody’s said the downgrade reflected its expectations that “China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows”.
The last time Moody’s cut China’s credit rating was 1989, the same year as the Tiananmen Square protests. The new move frustrated Beijing, where the finance ministry accused Moody’s of overestimating the risks facing the economy.
“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.
The downgrade is likely to increase – if only modestly – the cost of borrowing for Beijing and Chinese state-owned organisations, and it remains within the investment grade rating range. The negative view initially weighed on Asian markets, commodities and China’s currency on Wednesday.
Moody’s said Beijing’s planned economic reforms would not avert a significant rise in debt: “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.”
Government stimulus has been a key driver of growth in recent years, but it has also led to a sharp rise in credit and debt levels. Moody’s expects growth to slow to about 5% over the next five years. Last year the Chinese economy grew by 6.7% – the weakest since 1990.
Moody’s also cut the rating of 26 state-owned enterprises by one notch, shortly after the main sovereign downgrade. The list included China National Petroleum Corporation, China Three Gorges Corporation, Guangzhou Metro Group, and Dongfeng Motor Corporation.
China’s finance ministry insisted the country’s GDP would continue to grow at medium to high levels “ and that will provide fundamental support to fend off local government debt risks”. The ministry added: “China’s government debt risks will not change dramatically in the period of 2018-20 from 2016.”
Moody’s expects government debt to rise to 40% of GDP by the end of 2018, and to 45% by 2020.
Luc Froehlich, head of investment directing for Asian fixed income at Fidelity International, said China was facing a number of issues: “The downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage, declining economic growth rates and ongoing structural reforms.
“Despite these mounting pressures, we are confident that China’s central bank and its regulators are firmly in control of the situation.”
Chang Liu, China economist at Capital Economics, said activity in the country was likely to slow further in the forthcoming quarters as officials continue their efforts to rein in credit risks. He said a weaker property market could also start to weigh on the wider economy.
“The property sector may also become a headwind to growth in the coming quarters. There are already signs that property sales are cooling due to recently imposed curbs on residential purchases. If this continues, developers may begin to slow the pace of construction.”
The sovereign downgrade brought Moody’s into line with Fitch’s rating; Standard & Poor’s rates China one notch above its two rival agencies.