Moody's downgrades Hong Kong credit rating after China cut

China's Ministry of Finance (MOF) swiftly dismissed the new ratings on Wednesday, saying it was based on a "pro-cyclical" rating approach which is "inappropriate".

However, according to the IMF, while state-owned debt is high, China's external debt is relatively low by worldwide standards. Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008, according to Bloomberg Intelligence.

Chinese economic growth fell from 14.2 percent in 2007 to 6.7 percent a year ago, though that still was among the world's strongest. Moody's said it expects that the strength financially of the economy in China will erode during the next few years as its growth will slow and debut will continue rising.

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.

The downgrade also comes at a time when perhaps the Chinese debt market is showing notable signs of improvements.

The Moody's ratings agency on Wednesday cut China's credit rating due to surging debt, prompting a protest by Beijing and highlighting challenges faced by Communist leaders as they overhaul a slowing economy.

Moody's Investors Service downgraded China's long-term debt ratings late Tuesday to A1 from Aa3 and followed up Wednesday with a downgrade of Hong Kong's local- and foreign-currency ratings to Aa2 from Aa1. "China's leaders from President Xi Jinping down have said that structural reform and financial stability are priorities".

"It overestimated the difficulties that the Chinese economy is facing. and underestimated the Chinese government's ability to deepen supply-side structural reform and appropriately expand aggregate demand", the ministry said in a statement. In addition, Moody's expressed that despite the decline, at an A1 rating level the risks can still be balanced. According to the firm, the government's eagerness to achieve a massive economic growth despite sedated productivity and the abrupt dilution of the working-class aged citizens is really biting the country's back.

Systemic risk is relatively lowThe NDRC statement added, "China's debt is mostly domestic and our leverage is supported by a high deposit rate (at around 50 per cent), so the possibility to trigger systemic risks is relatively low".

Driven mainly by government stimulus, growth in the Chinese economy has gone hand in hand with rapid credit growth, creating a glut of debt that stands at nearly 300 percent of the country's GDP.

Investors shrugged off China's credit downgrade after several senior government officials in Beijing criticised the decision.

Peter Rosenstreich, Swissquote Bank, commented: "While the credit rating cuts failed to hurt China's stock markets, AUD headed lower following industrial commodities weakness and risk in China".



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