Moody's downgrades China's credit rating to A1 from Aa3

The rating agency's decision to downgrade long term local and foreign issuer ratings - down from Aa3 to A1 - emphasises a lack of confidence in the Chinese Government's ability to reign in current debt levels.

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 also expected contingent and indirect liabilities to rise due to the policy bank loans, bonds issued by Local Government Financing Vehicles and other state-owned enterprises' investments. The ministry added: "China's government debt risks will not change dramatically in the period of 2018-20 from 2016".

Hong Kong's participation in China's Belt and Road initiative brings the economy and financial systems closer together, Moody's also said.

China's debt-to-GDP ratio is more than 250 per cent, one of the highest in the world, "reflecting attempts by Beijing to continue pump-priming its economy and maintain growth and job creation as millions move from the countryside to make their fortunes in the cities", says Sky News.

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On the debt front, China's total and private debt is reported to be worth more than 250 per cent of GDP.

China's total outstanding credit surged to 260 percent of GDP by the end of previous year and the International Monetary Fund has warned that a debt crisis in the country could "imperil global financial stability". With external debt sitting at just 12 percent of GDP, the downgrade may not prove as damaging to China as it would for an economy more reliant on global borrowing. The government has trimmed its 2017 growth target to around 6.5 percent after it expanded 6.7 percent in 2016, the slowest growth rate since 1990. This is a big statement from the firm as China hasn't been downgraded for the last 30 years; the second largest economy in the world is now dealing with a clear sluggish performance on economic growth. Moody's now rates China's credit alongside that of countries such as Japan, Saudi Arabia and Israel.

The state planner, the National Development and Reform Commission, added in a statement that China's debt risks are generally controllable as measures to lower corporate leverage have achieved initial results, and systemic risks from debt are relatively low.

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic". 'Move makes no sense' But Liao said the move "makes no sense" because China's growth has improved from a year ago and the threat of trade protectionism from US President Donald Trump's administration has subsided.

Fitch's BBB-rating - the lowest investment grade rating - has been in place since August 2006, and S&P's BBB-rating from January 2007.

  • Ronnie Bowen