Moody's reduces China's credit rating over debt concerns


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.

Moody's also cut the rating of 26 state-owned enterprises by one notch, shortly after the main sovereign downgrade.

Estimates of China's total non-government debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent previous year. That reflects an expectation "China's financial strength will erode somewhat" and economy-wide debt will rise, Moody's said.

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. All the same, authorities have moved cautiously to avoid knocking economic growth, gingerly raising short-term interest rates while tightening regulatory supervision.

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Responding to Moody's assessment, the Chinese ministry of finance said the downgrade had been based on "inappropriate methodology" that exaggerated the country's economic difficulties, underestimated the potential of its reforms and evidenced a "lack of necessary understanding" of the country's budget laws.

Stocks in Shanghai and the Australian dollar slipped on the news.

The global ratings giant cut China from Aa3 to A1, equivalent to downgrade from AA- to A+ on the scales used by the other major agencies.

Commenting on the downgrade, PineBridge Investments co-head of Asia fixed income Arthur Lau said the decision was not a shock, given Moody's downgrade of China from "neutral" to "negative" in March.

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"In fact, the Chinese are well aware of some of the concerns highlighted by Moody's".

China now has the same credit rating as Japan, Saudi Arabia and Israel.

A report by the New York Times had listed China's total debt at $26.6tn (£20.4tn) for 2015, raising fears about a financial crisis that would mirror the 2008 U.S. crisis.

Moody's said it expects the government's direct debt burden to rise gradually toward 40 per cent of GDP by 2018 "and closer to 45 per cent by the end of the decade". In my view, it is likely that, like most of other analyses on China's debt risk, the Moody's analysis has confused China's private-sector obligations with public-sector debt. SOE debt in China now stands at a rate of 115% of GDP.

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China's finance ministry insisted the country's GDP would continue to grow at medium to high levels " and that will provide fundamental support to fend off local government debt risks".