Moody’s trims China’s credit rating over rising debt

BEIJING The Moody’s ratings agency on Wednesday cut China’s credit rating due to surging debt, prompting a protest by Beijing and highlighting challenges faced by communist leaders as they overhaul a slowing economy.

The downgrade adds to warnings about China’s reliance on credit to propel growth after the 2008 global crisis. Private sector analysts say it could drag on the economy or threaten the health of the state-owned banking industry.

Moody’s Investors Service cut Beijing ’s long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3. It said China’s financial strength is likely to erode as growth slows and debt will rise further.

“We expect direct government, indirect and economywide debt to continue to rise, signalling an erosion of China’s credit profile,” said a Moody’s statement.

The Chinese finance ministry criticized the decision. It complained Moody’s overestimated difficulties facing the world’s second-largest economy and underestimated Beijing ’s industrial reform and financial strength.

Estimates of China’s total nongovernment debt have risen from the equivalent of 170 per cent of annual economic output in 2007 to 260 per cent last year.

Communist leaders have cited reducing financial risk as a priority this year. They have launched initiatives to reduce debts owed by state companies, including by allowing banks to accept stock to repay loans. But private sector analysts say they are moving too slowly.

The Moody’s announcement triggered a sell-off in Chinese stocks. The country’s market benchmark, the Shanghai Composite Index, declined 0.6 per cent by midday.

A finance ministry statement accused Moody’s of using “inappropriate methods” that it said gave a false picture of China’s financial outlook.

The ministry complained Moody’s failed to give enough weight to economic reforms.

The government is trying to make the economy more productive by giving market forces a bigger role and “supply side reform,” or shrinking bloated industries such as steel and cement in which supply exceeds demand, which has depressed prices and led to financial losses.