China Hit With First Credit Downgrade In Decades

Reuters

Financial Secretary Paul Chan said he strongly disagreed with the rating agency's decision to "mechanically downgrade" Hong Kong's local currency and foreign currency issuer ratings by one notch to Aa2 from Aa1 shortly after cutting China's rating on Wednesday.

The agency also suggested Chinese authorities' emphasis on maintaining current levels of growth would result in further stimulus and increased debt.

Investors appear to have shrugged off Moody's downgrade of China's credit rating on Wednesday, after several senior government officials criticised the decision.

The Ministry of Finance dismissed the report, saying Moody's used "inappropriate methods" that prevented it from accurately reporting the country's true financial situation.

According to McCaffrey, China remains both the highest-ranked emerging market and the highest rated Asian market in A.T. Kearney's 2017 Foreign Direct Investment Confidence Index, and it continues its streak among the top three markets for FDI throughout the entire nearly 20 year history of the Index.

While acknowledging China's efforts to rebalance its economy away from reliance on debt-fuelled stimulus, Moody's obviously believes progress has been too slow to arrest deterioration in its financial strength.

Moody's changed its outlook for Hong Kong to stable from negative, citing the government's vast cash pile it can use to ward off financial and economic shocks.

However, he suspects the move could be worse for sentiment in the short-term and "reawaken markets to China risk". S&P's AA- rating is one notch above both Moody's and Fitch Ratings, leading to speculation among analysts that S&P could also downgrade soon. Meanwhile, the government is fixated on its economic growth targets which implies that an already high leverage will merely continue to grow.

"China's government debt risks will not change dramatically in the period of 2018-2020 from 2016", it added. Growth hit 10.6 percent in 2010 before sliding to a near-three decade low of 6.7 percent previous year.

China's potential economic growth was likely to slow towards 5% in coming years, but the cool-down is likely to be gradual due to expected fiscal stimulus, Moody's said. "But the two ratings, like the two regions, remain closely linked", it said.

However, it's not government debt that's concerning economists, but rather the amount of debt level of China's "state-owned enterprises" (SOEs) and debt carried by the country's local governments.

Government-led stimulus has been a major driver of China's growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt - now standing at almost 300 percent of gross domestic product (GDP).

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