Moody’s Investors Service yesterday slashed China’s credit rating for the first time in almost three decades, citing concerns about the country’s rising debt and slowing growth, but Beijing rejected the downgrade as “inappropriate.”
The move comes as China tries to clean up a toxic brew of unregulated and risky lending that has for years fueled the economy’s spectacular growth, although some analysts doubt Beijing’s willingness to quit its debt addiction.
“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” the agency said.
China’s total outstanding credit surged to 260 percent of GDP by the end of last year and the IMF has warned that a debt crisis in the country could “imperil global financial stability.”
The government has trimmed its growth target for this year to about 6.5 percent after it expanded 6.7 percent last year, the slowest growth rate since 1990.
China’s 13th five-year plan released last year announced an average annual growth rate of more than 6.5 percent for last year to 2020.
However, Moody’s said it expects China’s growth potential to decline to close to 5 percent over the next five years, citing diminishing investment, an accelerated fall in the working-age population and a continuing dip in productivity.
The Chinese Ministry of Finance rejected the assessment, saying Moody’s had used an “inappropriate” method to assess the risks facing the economy.
“It overestimated the difficulties that the Chinese economy is facing,” the ministry said in a statement, adding that the government’s debt ratio last year was 36.7 percent, lower than major market economies, and that the “expansion of the scale of government debt has been effectively controlled.”
Shanghai and Hong Kong stocks ended the morning lower following the downgrade.
“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 direct impact is that this would make China’s debt financing more difficult and the financing cost would also rise.”
“This is like throwing cold water when everyone is optimistic about China’s economy,” he added.
However, Liao said the move “makes no sense,” because China’s growth has improved from last year and the threat of trade protectionism from US President Donald Trump’s administration has subsided.
Moody’s cut the long-term local currency and foreign currency issuer ratings from “Aa3” to “A1,” the first reduction since late 1989, when it assessed the impact of the Tiananmen Square Massacre on China’s trade with the world.
However, Moody’s upgraded its outlook from “negative” to “stable,” where it had been since March last year.
“The stable outlook reflects our assessment that, at the ‘A1’ rating level, risks are balanced,” Moody’s said in its ratings note.
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