Moody's Downgrade Highlights China Fears

The US ratings agency downgraded Hong Kong's rating to Aa2 from Aa1 and said credit trends in China would continue to have a significant impact on Hong Kong's credit profile due to close economic, financial and political ties with the mainland.

Looking ahead, Moody's expects China's growth potential to decline to close to 5 per cent over the next five years, for three reasons.

The company also noted that the importance the Chinese authorities have attached to maintaining robust growth will result in sustained policy stimulus, and such government spending will contribute to rising debt across the economy.

A finance ministry statement accused Moody's of using "inappropriate methods" that it said gave a false picture of China's financial outlook.

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.

China's total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160 per cent in 2008, according to Bloomberg Intelligence.

"The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced", it said in its ratings note.

Communist leaders have cited reducing financial risk as a priority this year.

China has received a downgrade on its credit score, on worries about the future state of the economy.

Nonetheless, China's leaders have identified the financial risks to the country and asset bubbles as a top priority this year, raising short-term interest rates and tightening regulatory supervision in a bid to boost growth and reign in an economic slowdown.

The government has trimmed its growth target for this year to about 6.5 percent after it expanded 6.7 percent last year, the slowest growth rate since 1990.

Mei added that the China downgrade amounted to a "double standard" compared with how countries in Europe and the United States were treated. But now the shock eased as economists argued that the relatively low level of China's worldwide debts means that the cut should be not as important for China as it would be for countries more dependent on credit. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

China now has the same credit rating as Japan, Saudi Arabia and Israel. The poorer the rating ascribed then the greater the possibility that an investment might fail to deliver its promised return and, therefore, the higher the interest that an issuer needs to pay to attract the punters, er investors. 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.

  • David Armstrong