China dismisses credit downgrade

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Moody's Investors Service cut China's sovereign credit rating for the first time in almost three decades, citing expectations that the country's financial strength will deteriorate in the coming years as debt keeps rising and the economy slows.

Moody's Investors Service today downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

Responding to Moody's assessment, the Chinese ministry of finance said the downgrade had been based on "inappropriate methodology" that exaggerated the country's economic difficulties, underestimated the potential of its reforms and evidenced a "lack of necessary understanding" of the country's budget laws.

"The downgrade in Hong Kong's rating reflects Moody's view that credit trends in China will continue to have a significant impact on Hong Kong's credit profile due to close and tightening economic, financial and political linkages with the mainland", it said in a statement.

China's total non-government debt is estimated to have jumped to 260% of gross domestic product in 2016, from 170% in 2007.

China's economy has for always been fuelled by economic stimulus and cheap credit and the government thereis now grappling with ways to steer the economy clear of a debt crisis as growth slows.

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Moody's changed Hong Kong's outlook to stable from negative, denoting that the risks to the city's rating are balanced. Moody's rating places China on par with countries such as Japan, Saudi Arabia and Estonia. 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.

Meanwhile, MSCI said China has a "lot of issues" to fix before its shares can be included in global benchmark indices, according to Bloomberg.

Also, as per the report, India's revenues at 21 per cent of GDP are considerably lower than the median income of countries with the BAA ratings: 27.1 per cent.

The Moody's move brings it more in line with rival agency Fitch, which last downgraded China in April 2013.

"The planned reform program is likely to slow, but not prevent, the rise in leverage". Their ratings range from the ultra-secure triple A-rated investment grade bonds via lower classifications to the speculative or junk ratings. 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. But, with an excessive leverage of the financial system, it would be hard for China to keep growth rates above the target of at least 6.5 per cent.

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