China’s sovereign credit rating downgraded by Moody’s

China’s sovereign credit rating has been downgraded by Moody’s for the first time in nearly 30 years.

The credit ratings agency (CRA) said that the one-notch downgrade – from its fourth-highest rating of Aa3 to A1, reflected the likelihood that China’s financial strength will deteriorate in the years ahead, as growth slows and its national debt continues to rise in response the drive towards a more consumer-driven economy.

In its accompanying commentary, the CRA said: “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.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.”

“Moody’s expects that economy-wide leverage will increase further over the coming years. 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, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”

China’s Finance Ministry said in response that the downgrade, Moody’s first for the country since 1989, overestimated the risks to the economy and was based on “inappropriate methodology”.

“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand.”

China’s gross domestic product (GDP) growth has cooled from a peak of 10.6% in 2010 to 6.7% last year and some analysts expect the country’s growth potential to decline to dip further to 5% over the next five years.

Three contributory factors are cited: firstly the likelihood that capital stock formation will slow as investment accounts for a diminishing share of total expenditure; secondly an acceleration of the fall since 2014 in the working age population; and thirdly expectation that a productivity slowdown in recent years will not be reversed.

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