South East Asia

Moody’s Downgrades China’s Credit Rating

Mounting debt and a potentially slowing economy have pushed Moody’s to downgrade China’s bond rating for the first time in 30 years.

China’s credit rating has officially taking a one-notch hit in long-term local and foreign currency issuer ratings, to A1 from Aa3.

“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 ratings agency said in a statement, changing its outlook for China to stable from negative.

China’s Finance Ministry unsurprisingly disagrees with Moody’s assessment — and says Moody’s has overestimated the risks and based its findings on  “inappropriate methodology.”

“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.

Chinese officials have already set containing financial risk and holding asset bubbles at bay as top priorities this year — while also trying to push economic growth more gingerly by raising short-term interest rates and tightening regulatory supervision.

Moody’s, however, is concerned that the Chinese plan — while sufficient to clear growth milestones — will make the economy more indebted.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” it said.

While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs), it is not at any risk of losing its investment grade bond rating. The yuan currency briefly dipped against the U.S. dollar in offshore trading, as did the Australian dollar.

“After being very much at the front and center of global risk sentiment at the beginning of last year, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the U.S. taking the limelight,” said David Cheetham, chief market analyst at brokerage XTB.

“It’s going to be quite negative in terms of sentiment, particularly at a time when China is looking to de-risk the banking system (and) when there’s going to be some potential restructuring of SOEs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank’s Treasury division.

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