Author: China National News
Posted: Thursday 25th May, 2017
Sending shock waves amongst investors in Asian trading, credit rating agency, Moody’s downgraded China’s sovereign credit rating for the first time since 1989 overnight on Tuesday.
Moody’s downgraded its long-term local and foreign currency issuer ratings from Aa3 to A1 and further changed its outlook for China, to stable from negative.
The agency said the downgrade was prompted by worries about rising debt in Asia’s economic powerhouse.
Moody’s also warned that the economy’s financial strength will erode in the coming years as debt continues to rise.
In a statement, Moody’s said, “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 also noted that China’s need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus.
It added, «While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.»
Earlier, in March last year, Moody’s cut its outlook on China’s ratings to negative from stable.
It had then cited rising debt and uncertainty about authorities’ ability to carry out reforms.
The same month, rival ratings agency Standard & Poor’s downgraded its outlook to negative.
Moody’s had last cut its China credit rating in November 1989 after the bloody crackdown on mass protests in Beijing’s Tiananmen Square rocked the nation.
With the new change, Moody’s now rates China’s credit alongside that of countries such as Japan, Saudi Arabia and Israel.
Commenting on the news, China’s Ministry of Finance said the downgrade was based on an «inappropriate» procyclical method.
In a statement posted to its website, the ministry said the ratings agency’s decision «overestimated the difficulties in the Chinese economy, while underestimated the ability of the Chinese government to deepen supply-side reforms and reasonably expand total demand.»
In recent months, Beijing has intensified a campaign to rein in risky investment and financing practices that pose a serious threat to the stability of the world’s second-largest economy.
Since early February, the People’s Bank of China has raised a suite of key short-term interest rates twice.
The banking regulator meanwhile has cracked down on investment products with highly leveraged bets in capital markets.
In the first quarter of 2017, China posted economic growth of 6.9 percent.
Analysts have raised concerns that China’s economy has become too reliant on ever-rising levels of credit, much of which has been provided by the country’s expanding shadow banking sector.
According to J.P. Morgan, China’s total debt reached 253 percent of its gross domestic product in 2016, up from 213 percent in 2013 and 149 percent in 2008.
According to Zhu Chaoping, a China economist at UOB Kay Hian Holdings, a Singapore investment bank, the Moody’s downgrade could have an impact on China’s exchange rate and economy over the longer term as it could weaken Chinese companies’ ability to raise new debt or repay existing loans in global markets.
Zhu explained, «Once Chinese companies run into trouble with their overseas debt, the yuan will be under pressure.”
Meanwhile, the downgrade triggered an early selloff in Chinese stocks.
Shares in Shanghai fell more than 1 percent before recovering, in addition to modest losses for the Chinese currency in the freely traded offshore market.
China’s main indices however recouped earlier losses following the downgrade, despite initial falls.
The blue-chip CSI300 index was unchanged at 3,424.17 points.
The Shanghai Composite Index added 0.1 percent to 3,064.08 points.
World stocks meanwhile inched lower on Wednesday after the downgrade, as investors eyed a pause in Wall Street’s four-day winning streak, which is the longest in over three months.
The dollar and U.S. bond yields were steady, while oil wiped out earlier gains ahead of OPEC’s meeting on Wednesday.
Europe’s index of leading 300 shares was flat on the day around 1,540 points.
MSCI’s global share index was down 0.1 percent.
U.S. stock futures pointed to a fall of up to 0.1 percent at the open on Wall Street.
Germany’s DAX and France’s CAC 40 were both down 0.2 percent.
Britain’s FTSE 100 was up 0.3 percent to within 20 points of last week’s record high of 7,533.70 points.
MSCI’s broadest index of Asia-Pacific shares outside Japan slipped 0.1 percent.
Japan’s Nikkei stock index ended 0.7 percent higher.
According to Luc Froehlich, Fidelity International, “Today’s downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining economic growth rates and ongoing structural reforms. Despite these mounting pressures, we are confident that China’s central bank and its regulators are firmly in control of the situation. In particular, China’s recent regulatory tightening should help deflate the country’s credit markets and lead to long-term market stabilization. ”
Meanwhile, Aidan Yao, AXA Investment Managers said, “China had been put on negative rating outlook since March 2016. Compared to other agencies, S&P has China on AA- with negative outlook, while Fitch assigns China A+ with stable outlook, same as Moody’s after today’s decision. Underpinning the rating action was Moody’s concern over China’s deteriorating leverage condition, and that the official reform program, as it currently stands, won’t be enough to completely arrest the build-up of debt.»