Moody’s downgrades China on rising debt

SHANGHAI/BEIJING: Moody’s Investors Service downgraded China’s credit ratings on Wednesday for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.

The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of creditfuelled stimulus.

“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.

China’s Finance Ministry said the downgrade, Moody’s first for the country since 1989, overestimated the risks to the economy and was based on “inappropriate methodology”.

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

China’s leaders have identified the containment of financial risks and asset bubbles as a top priority. All the same, authorities are moving cautiously to avoid knocking economic growth, gingerly raising shortterm interest rates while tightening regulatory supervision.

At the same time, Beijing’s need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus, Moody’s said.

While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs), it remains comfortably within the investment grade rating range.