Moody's cuts China debt rating for first time since 1989

Moody's downgrades China's rating for first time since 1989One of the world's biggest credit rating agencies, Moody's Investors Service, has downgraded China.

The country has for years been pumping credit-fueled stimulus as part of efforts to achieve growth internally rather than relying on exports, but this has raised fears about China's rising debt levels.

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.

Moody's downgrade of China's credit rating today could lead to investors shunning the region, emerging market economists warn.

The downgrade is a reflection of Moody's expectation that the country's financial strength will weaken in the next few years, following a continuously rising economy-wide debt and a slowing down of potential growth.

China's finance ministry said the downgrade is due to an overestimate of the risks to the economy and was based on "inappropriate methodology".

While China's leaders acknowledge the necessity for effectively containing financial risks and asset bubbles, financial authorities wary of knocking economic growth, are not ready to raise short-term interest rates and tighten regulation.

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

According to Moody's, the down tempo of the GDP movement was mainly because of the lack of structural development, and it is expected to continue to be stagnant for the following years. Gross domestic product grew 6.9 percent in the first quarter, above the full-year target of 6.5 percent and the 6.8-percent growth in the fourth quarter of 2016.

Botham says that while China is not over-reliant on foreign lenders - external debt represents 13 per cent of GDP - the downgrade may destabilise the markets.

But, since banks are mostly state owned, and it is assumed the government would intervene in a crisis, banks are often allowed to issue debt at a higher rating.

In downgrading Hong Kong, the agency outlined the growing links between the city and the mainland, with banks increasing China-related lending, while its stock market is also linked to bourses in Shanghai and Shenzhen through separate tie-ups.

China's Shanghai Composite index fell more than one percent in early trade before paring losses, while the yuan currency in the offshore market briefly dipped almost 0.1 percent against the USA dollar after the news. "External debt in China is just 13% of GDP, so reliance on foreign lenders is limited", said Botham.

But Moody's said it expects China's growth potential to decline to close to 5 per cent over the next five years, citing diminishing investment, an accelerated fall in the working age population and a continuing dip in productivity. The planned reform programme is likely to slow, but not prevent, the rise in leverage.

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