Moody's downgrades China, warns of fading financial strength as debt mounts

Record ID: 876846

  • Title: Moody's downgrades China, warns of fading financial strength as debt mounts
  • Date: 24th May 2017
  • Summary: CHONGQING, CHINA (FILE) (REUTERS) CRANES AT CONSTRUCTION SITE WORKER HOLDING CONSTRUCTION MATERIALS WORKERS WORKING AT CONSTRUCTION SITE CRANES MOVING VARIOUS OF INVESTORS SITTING IN STOCK EXCHANGE ROOM
  • Embargoed: 7th June 2017 11:07
  • Keywords: GDP growth economy China Moody's downgrade
  • Location: LONDON, ENGLAND, UK / BEIJING, SHANGHAI AND CHONGQING, CHINA
  • City: LONDON, ENGLAND, UK / BEIJING, SHANGHAI AND CHONGQING, CHINA
  • Country: China
  • Topics: Economic Events
  • Reuters ID: LVA0036I768P9
  • Aspect Ratio: 16:9
  • Story Text:Moody's Investors Service downgraded China's credit ratings on Wednesday (May 24) for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.
    The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fuelled stimulus.
    "The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows," the rating agency said in a statement, changing its outlook for China to stable from negative.
    China's Finance Ministry said the downgrade, Moody's first for the country since 1989, overestimated the risks to the economy and was based on "inappropriate methodology".
    While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs), it remains comfortably within the investment grade rating range.
    China's Shanghai Composite index .SSEC fell more than 1 percent in early trade before paring losses, while the yuan currency in the offshore market CNH=D3 briefly dipped nearly 0.1 percent against the U.S. dollar after the news.
    The Australian dollar AUD=, often see as a liquid proxy for China risk, also slipped.
    Moody's said it expects the government's direct debt burden to rise gradually towards 40 percent of GDP by 2018 "and closer to 45 percent by the end of the decade".
    A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount.
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