China’s credit rating has been cut for the first time since 1989 amid fears of unsustainable debt levels and slowing economic growth.
Credit rating firm Moody’s downgraded Chinese debt one notch on its scale, from Aa3 to A1. This is still a rating near the top of the scale however, and is considered ‘investment grade.’
On the Moody’s scale the better ratings start with an ‘A’ and the lesser ratings start with a ‘B’ or even a ‘C’ for the riskiest bonds.
Moody’s has downgraded China’s debt one notch on its scale, from Aa3 to A1.
Moody’s said it had taken the step as it believes China’s financial strength will ‘erode somewhat’ as economic growth slows and but its debts continue to mount.
World markets have not been hit particularly hard, although there was a small sell-off of Chinese stocks which saw the Shanghai Composite Index dip nearly 1 per cent in Asian trading.
The downgrade was not received well by China, with the government accusing the ratings agency of using ‘inappropriate methods.’
The Chinese finance ministry claimed Moody’s had painted an inaccurate picture of the country’s financial outlook.
It said in a statement: ‘It overestimates the difficulties facing the Chinese economy and underestimates the government’s ability to deepen supply-side structural reform and appropriately expand overall demand.’
China’s total non-government debt is estimated to have climbed from 170 per cent of gross domestic product in 2007 to 260 per cent by 2016.
Economic growth in China is going in the other direction, dropping from 14.2 per cent in 2007 to 6.7 per cent last year, according to the finance ministry. Some believe it is actually lower than that.
World markets have not been hit particularly hard by the news but the Shanghai Composite Index dipped nearly 1 per cent after the announcement.
The ministry said the country’s growth rate had edged up to 6.9 per cent in the first quarter of 2017.
Moody’s said it expects China’s growth to decline to close to 5 per cent over the next five years.
According to Craig Botham, emerging market economist at Schroders, the effect on investor sentiment of the downgrade could be greater than its economic impact.
‘Catching up with reality, credit rating agency Moody’s has downgraded China’s sovereign credit rating due to concerns that rising debt and slowing growth will erode the country’s financial strength,’ he added.
‘This risk has been flagged by market participants for some time, given that credit growth has routinely outstripped nominal GDP growth for years.’
‘Perhaps what has crystallised these concerns for Moody’s has been the modest attempts of the authorities this year to tighten policy,’ Botham continued. ‘Marginal increases in policy rates have seen larger moves in bond yields, with tighter regulation around lending also responsible.’
‘This serves to highlight how difficult it will be for the Chinese government to truly tackle the rising leverage problem.It is evident that policy tightening is disruptive, and at odds with the growth targets pursued by the ruling party.’
‘The statement from Moody’s that accompanied the downgrade hinted at this. It referred to "Institutional Strength" in China as moderate, to reflect the challenge of reducing leverage while preserving robust GDP growth.’