Moody's cuts China's rating

Photo by Mark Kolbe/Getty Images

Moody’s Investors Services cut China’s long-term local and foreign currency issuer ratings on concerns the country’s financial strength would erode in the coming years, while debt rises.

The outlook for China was changed from stable to negative. The rating was dropped by a notch from Aa3 to A1, which is still comfortably in the investment grade, Moody’s said.

A short while ago, the Shanghai composite share index fell 0.4% and is on course for its lowest closing level since October. The yuan in the offshore market was little changed after an initial dip.

“Moody’s expects that economy-wide leverage will increase further over the coming years,” the ratings agency said.

“The planned reform program is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus. Such stimulus will contribute to rising debt across the economy as a whole.”

Moody’s changed its outlook on China’s government credit ratings to negative from stable in March 2016. It then citing rising debt and uncertainty about the the government’s ability to push through with reforms to ease out the economic imbalances.

S&P cut its outlook to negative in the same month. Its AA- rating is one notch above both Moody’s and Fitch Ratings’ A+ rating.

China is faced with balancing the challenges of slowing economic growth and rising financial risks stemming from soaring debt.

Moody’s expect the Chinese government’s direct debt burden to rise 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns of 40.7% and higher than the median of Aa-rated sovereigns of 36.7%.

It also estimated that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year.

That comes as GDP growth slipped from a peak of 10.6% in 2010 to 6.7% in 2016. Moody’s expect China’s growth to decline to close to 5% over the next five years, for the following three reasons.

* Capital stock formation will slow as investment accounts for a diminishing share of total expenditure.
* The fall in the working age population that started in 2014 will accelerate.
* It doesn’t expect a reversal in the productivity slowdown that has taken place in the last few years

“Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China’s credit profile which is best reflected now in an A1 rating,” Moody’s said.

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