Moody's Investors Service yesterday slashed China's credit rating for the first time in nearly three decades, citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate".
Moody's Investor Services today announced a downgrading of China's credit rating to a negative A1 from a stable Aa3, the first time in almost 30 years, over concerns of weakening of the financial strength of the world's second-largest economy.
Moody's also forecast that China's growth potential will decline to about 5 per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown.
The Chinese Finance Ministry, sure enough, is disputing the Moody's verdict, and China's tightly insulated domestic markets have shrugged off the demotion.
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. It affirmed the Aa3 rating of Macau and upgraded its outlook to stable from negative.
The country is trying to contain financial risks and to avoid asset bubbles forming while maintaining growth.
The government has trimmed this year's growth target to around 6.5 per cent after it expanded 6.7 per cent last year, the slowest growth rate since 1990.
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"The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen", Moody's said. The poorer the rating ascribed then the greater the possibility that an investment might fail to deliver its promised return and, therefore, the higher the interest that an issuer needs to pay to attract the punters, er investors.
"The downgrade will certainly affect China negatively", Citic Bank International (中信銀行國際) Hong Kong-based chief economist Liao Qun (廖群) said.
"The planned reform programme is likely to slow, but not prevent, the rise in leverage", the firm said. Broadly, China's commercial sector has a lower rating than the government.
The cut to China's long-term local currency rating puts the country on par with Czech Republic, Estonia, Israel, Japan and Saudi Arabia and one level below other sovereign borrowers, including Taiwan and Macau, and one notch above the likes of Bermuda, Botswana, Poland and Slovakia.
Major stock indexes across the European continent are dragging on Wednesday, pulled lower by news overnight that China's credit rating has been cut by ratings agency Moody's.
Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.
China's economy grew at the rate of 6.7 per cent in 2016, as compared with 6.9 per cent in the previous year.