Stocks in retreat after the rating
CHINA’S stocks headed for their lowest level since October, the yuan retreated and default risk increased after Moody’s Investors Service cut its rating on the nation’s debt for the first time in almost three decades.
The Shanghai Composite Index fell as much as 1.3 percent before paring declines to 0.7 percent at 2.10pm local time. The yuan dropped 0.05 percent against the dollar, and the cost of insuring fiveyear sovereign debt from non-payment rose 3 basis points.
The Moody’s downgrade to A1 from Aa3 comes as local investors desert the equity and bond markets amid a government campaign to cut risk in the financial sector. The Shanghai gauge is the world’s worst-performing major benchmark index this quarter, sliding more than 5 percent. The yield on China’s 10-year government debt is at 3.68 percent, close to a twoyear high.
Chinese stocks are facing a “bigger challenge” than the Moody’s downgrade, said Hao Hong, Hong Kong-based chief strategist at Bocom International Holdings. “As the market wobbles, many of the stocks used for pledged loans are nearing the level that could trigger margin calls. This is probably a bigger risk nearterm. So together with this rating downgrade, it is negative for the market – but not just the downgrade itself.”
Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances. China’s Ministry of Finance said that the ratings company underestimated the capability of the government to deepen reform and boost demand. Total outstanding credit climbed to about 260 percent of GDP by the end of 2016, up from 160 percent in 2008, according to Bloomberg Intelligence.
“The timing of the downgrade came as a surprise,” said Sandra Chow, analyst at CreditSights in Singapore. “So the surprise element may cause a knee-jerk negative reaction, but the chase for yield may draw spreads back in.”
Moody’s lowered China’s credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and an uncertainty over authorities’ ability to carry out reforms. About a month later S&P Global Ratings also warned that rising local debt was pressuring the nation’s rating.
Health-care, materials and industrial shares were among the biggest losers on mainland markets. The ChiNext gauge of small-cap companies erased a loss of 1.6 percent to trade little changed, while Hong Kong’s Hang Seng Index dropped 0.2 percent. Iron ore futures slid 4.7 percent on the Dalian Commodity Exchange. – Bloomberg