China just got its first credit downgrade since 1989

China's total outstanding credit was worth an alarming 260% of its GDP previous year, up from 160% in 2008, according to Bloomberg.

"None of the things that Moody's is talking about, right, has any merit outside the strict interpretation of a pure capitalist economy and China is not a purely capitalist economy".

The decision by Moody's Investors Service to downgrade China's credit rating is "illogical" and overstates the levels of government debt, a commerce ministry researcher said in an editorial in the official People's Daily newspaper on Thursday. In this photo taken Tuesday, May 23, 2017, a worker install light bulbs at a cafe undergoing renovation in Beijing, China.

The move comes as China tries to clean up a toxic brew of unregulated and risky lending that for years has fuelled the economy's spectacular growth, though some analysts doubt its willingness to quit its debt addiction.

The rapid rise in Chinese debt since the 2008 global crisis has prompted warnings it will drag on growth and threaten banks.

Moody's also claimed that increases in China's local government financing platforms and debt owed by SOEs would lead to rising government contingent liabilities.

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.

The Chinese finance ministry criticized the decision.

Earlier on April 9, 2013, Fitch Ratings downgraded China's long-term local currency rating to A+ from AA-, the first sovereign rating cut since 1999.

"China will continue the process of financial deleveraging while preventing systemic financial risks as the nation has pledged to stick to the basic tone of "seeking progress while maintaining stability" this year", Scotiabank commented in its latest research report.

Moody's also note that Beijing's increasing reliance on financial stimulus to drive economic growth makes fixing growth targets unfeasible.

"In fact, the Chinese are well aware of some of the concerns highlighted by Moody's".

By the lunch break, the CSI300 index fell 0.3 percent to 3,412.76 points while the Shanghai Composite Index lost 0.4 percent to 3,050.94 points.

In a translated statement, China's Finance Ministry said the downgrade overestimated the risks to the economy and was based on "inappropriate methodology". China's state planner said debt risks were generally controllable.

While the Chinese government budget deficit in 2016 was at around three per cent of gross domestic product (GDP), Moody's expected the government's debt would rise toward 40 per cent of GDP by 2018 and 45 percent by the end of the decade.

Moody's cut their rating on the country by one notch, from A1 to Aa3. But growth has repeatedly dipped faster than planners wanted, raising the risk of politically unsafe job losses. "The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account". "What this ratings downgrade on China's debt boils down to is whether you fundamentally believe the Chinese government has the ability to write this debt off or not".

Moody's growth forecast for China, over the next five years.

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