China's credit downgrade could 'reawaken risk'

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.

It said in a statement that the downgrade - the agency's first for the country since 1989 - overestimated the risks to the economy, underestimated Beijing's industrial reform and financial strength and was based on "inappropriate methodology".

Moody's, the credit rating organisation, has downgraded China's credit rating for the first time in more than 25 years due to concerns over the slowing growth and rising debt of the Chinese economy.

In March 2016, Moody's changed its outlook on China's government credit ratings to negative from stable, citing rising debt and uncertainty about the authorities' ability to carry out reforms and address economic imbalances.

The firm expects another 5% decline in the country's growth potential; they believe that the capital stock formation will be slowing down, the continued shrinking of working age population will likely be boosted in the coming years, and lastly, a shift in the current trend on the declining growth potential is expected.

The MOF pointed out another error in Moody's credit rating criteria as it mingled government debt with local government financing platforms and debt of State-owned enterprises.

Meanwhile, China's Ministry of Finance responded to the downgrade, stating Moody's underestimated the capability of the government to deepen reform and boost demand.

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

China grew 6.7 per cent previous year down from 6.9 per cent in 2015 - the slowest growth since 1990.

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The ministry also refuted Moody's expectation that China's government debt-to-GDP ratio would rise to 40 percent in 2018.

The ministry said the Chinese government's liability ratio stood at 36.7 percent to GDP by the end of past year, compared to the European Union's 60 percent and far below the level of other major economies and emerging markets.

The downgrade adds to warnings about China's reliance on credit to propel growth after the 2008 global crisis.

Beijing should be able to weather any negative shocks, helped by the country's relatively strong economic growth, it added. It said that, in absolute terms, China's debt level was not high compared to the likes of the U.S. and UK.

"We expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile", Moody's said in a statement.

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