Moody's lowers China credit rating as growth slows

China's economy is likely to become increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, Moody's said.
China's economy is likely to become increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, Moody's said.PHOTO: REUTERS

China national debt expected to climb, says credit rating agency

Moody's Investor Services has downgraded China's credit rating for the first time in almost three decades.

The credit rating agency warned that the financial strength of the world's second-biggest economy is likely to deteriorate in the coming years as growth slows and national debt continues climbing.

The cut to China's long-term local currency rating to A1 from Aa3 puts the country on a par with the Czech Republic, Estonia, Israel, Japan and Saudi Arabia. The last time Moody's downgraded China was in November 1989, a few months after a bloody Tiananmen Square protest crackdown.

"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 credit rating agency said in a statement.

This is likely to make the economy increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, it added.

 

Moody's also changed its China outlook to stable from negative, saying risks are "balanced" and the "erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen".

China grew 6.7 per cent last year down from 6.9 per cent in 2015 - the slowest growth since 1990.

China's authorities dismissed the ratings cut, saying Moody's was exaggerating the country's economic difficulties and underestimating reform efforts.

Moody's sees China's growth potentially declining to near 5 per cent over the next five years, even as the government's direct debt burden rises towards 40 per cent of gross domestic product by 2018 from about 14 per cent now.

The downgrade is likely to modestly lift borrowing costs for Beijing and its state-owned enterprises but remains comfortably within the investment-grade rating range.

  • 6.7% 

    China's growth last year, down from 6.9 per cent in 2015 - the slowest growth since 1990.

    5% 

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

China's authorities dismissed the ratings cut, saying Moody's was exaggerating the country's economic difficulties and underestimating reform efforts.

Chinese policymakers have been making efforts to clean up lending practices, which have been viewed as a threat to financial stability.

The move brings Moody's in line with rival Fitch, which has had an equivalent A+ rating on China since November 2007. Standard & Poor's recently upgraded China's rating to AA-, equivalent to one notch above Moody's new rating.

China's financial markets were shaken by the move but quickly brushed it off. Stocks, bonds and the currency were little changed.

The Shanghai Composite Index closed up 0.1 per cent, after slumping as much as 1.3 per cent earlier in the day. The yuan was steady against the United States dollar.

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic".

"Our projections show that China would still be able to maintain (a growth rate) of around 6 per cent by 2020," he noted. "The risks cited by rating agencies are well covered and are not anything new.

"China's central government debt level remains low and debt is primarily local currency denominated. We see ample buffers from the central government and People's Bank of China to manage the economic and financial risks," Mr Suan added.

A version of this article appeared in the print edition of The Straits Times on May 25, 2017, with the headline 'Moody's lowers China credit rating as growth slows'. Print Edition | Subscribe