China Hit With First Credit Downgrade In Decades

"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", Marie Diron, the agency's associate managing director for sovereign risk, wrote in Wednesday's statement.

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

The news of the downgrade in China's long term local currency rating - one notch to an A1 rating from AA3 saw Chinese stockmarkets sell off by 1% for a while before they recovered, while the Australian dollar dropped by around 0.3% before steadying to trade around 74.50 USA cents. While the move brings Moody's in line with rival agency Fitch, which has had an equivalent A+ rating on China since November 2007, Standard & Poor's recently upgraded China's rating to AA-, which is one notch above Moody's new rating.

Moody's Investors Service yesterday slashed China's credit rating for the first time in nearly three decades, citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate".

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

The Chinese finance ministry claimed Moody's had painted an inaccurate picture of the country's financial outlook.

China's total non-government debt is estimated to have climbed from 170 per cent of gross domestic product in 2007 to 260 per cent by 2016.

Communist leaders have cited reducing financial risk as a priority this year. But private sector analysts say they are moving too slowly.

World markets have not been hit particularly hard, although there was a small sell-off of Chinese stocks which saw the Shanghai Composite Index dip almost 1 per cent in Asian trading.

China's Finance Ministry today dismissed a credit downgrade by Moody's, saying it is based on "inappropriate methodology" and argued that the rating firm has overestimated the difficulties faced by the world's second largest economy. The government is trying to make the economy more productive by giving market forces a bigger role and through "supply side reform", or shrinking bloated industries such as steel and cement in which supply exceeds demand, which has depressed prices and led to financial losses.

The finance ministry noted the growth rate ticked up to 6.9 percent in the quarter ending in March and said tax revenue rose 11.8 percent in the first four months of the year.

China's 13th five-year plan released last year announced an average annual growth rate of more than 6.5 percent for last year to 2020. Beijing has responded by flooding the economy with credit.

Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth. "Such stimulus will contribute to rising debt across the economy as a whole".

But Moody's said it expects China's growth potential to decline to close to five percent over the next five years, citing diminishing investment, an accelerated fall in the working age population and a continuing dip in productivity.

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