China’s rising debt prompts downgrade by Moody’s

China’s rising debt and slower growth prompted Moody’s Investors Service to downgrade the country’s credit rating on Wednesday.

The rating agency’s move — technically cutting China’s longterm currency issuer rating to A1 from Aa3 — could mean higher borrowing costs for the government, its institutions and state- owned enterprises.

The Chinese government criticized the downgrade, calling it “inappropriate,” according to the state news agency Xinhua.

Moody’s last cut China’s sovereign rating in 1989 when the country’s economic momentum was stunted by the government’s violent reaction to the Tiananmen Square protests.

“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,” said Moody’s, which changed its outlook for China to stable from negative.

Despite its booming domestic economy, Chinese officials continue to emphasize exports to sustain growth. The policy has led to stimulus programs and continued borrowing by state-owned enterprises. China’s debt — including debt owed by the government, households and nonfinancial companies — has grown to more than 250% of its gross domestic product, triggering some comparisons to the U.S. before the financial crisis in 2008.

“While such debt levels are not uncommon in highly-rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China’s,” Moody’s said.

Still, Moody’s upgrade of China’s outlook to “stable” reflects its assessment that the decline of China’s credit profile will be “gradual” and eventually be contained as reforms deepen, it said. With its manufacturing still robust and exports growing, China’s GDP will continue to grow and likely “stay strong,” it said.

But that growth rate — while still higher than developed nations — has slowed, sinking to 6.7% in 2016 from a peak of 10.6% in 2010.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years.” Moody’s