China's credit rating downgraded by Moody's from Aa3 to A1

China angry

Hong Kong on Thursday criticized a decision by Moody's to cut the city's credit rating, just hours after China's credit rating was downgraded over concerns of ballooning debt and slowing economic growth.

It's "absolutely groundless" for Moody's to argue that local government financing vehicles and state-owned enterprise debt will swell the government's contingent liabilities, according to a statement released by the Ministry of Finance.

This is likely to make the economy increasingly reliant on policy stimulus, which could in turn exacerbate rising debt levels, it added. Beijing rejects Moody's opinion that financial growth may fade with the finance ministry accusing Moody's of exaggerating economic difficulties and underestimating reforms.

But the country's economy has picked up since the second half of 2016, with its GDP growth reaching 6.9 per cent in the first quarter of this year.

Estimates of China's total nongovernment debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent a year ago.

The agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong.

"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.

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




Global banking and financial advisory provider Macquarie, "This news is a clear China negative in our view (even though the rationale for the downgrade contained nothing new)", and "The next question is whether S&P will follow Moody's".

Moody's cited the likelihood of a "material rise" in economy-wide debt and the burden that it will place on the state's finances. Their ratings range from the ultra-secure triple A-rated investment grade bonds via lower classifications to the speculative or junk ratings.

China's local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3.

Sun Binbin, chief analyst with TF Securities, believes the downgrade showed that Moody's "does not quite understand China's development pattern and path".

Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.

However, China may see in Western agency credit ratings alarms for risk controls.

However, Liao said the move "makes no sense", because China's growth has improved from past year and the threat of trade protectionism from US President Donald Trump's administration has subsided.

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