Concerns over the strength of the Chinese economy has led to Moody's downgrading the nation's credit rating for the first time in more than a quarter of a century.

Downgraded to A1

Downgrading long-term local and foreign currency issuer ratings by one notch to A1, Moody's Investors Services expressed fears that China's financial strength would weaken amid slowing growth and rising debt. But China's Finance Ministry accused the agency of using “inappropriate methodology” that had resulted in the country's economic problems being overestimated, while underestimating the government's economic reform programme.“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 agency stated, as it changed its outlook for China to stable from negative. 

Increased cost of borrowing

The downgrade could marginally raise the cost of borrowing for the Chinese government at a time when the Peking regime tries to implement reforms aimed at curbing rising financial risks after years of credit-fuelled stimulus.In a statement, the Finance Ministry said, “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.”

'A psychological blow'

Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, described the downgrade as “a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures”.But he added, “It doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”China's National Development and Reform Commission (NDRC) said debt risks were generally controllable as measures to lower corporate leverage had achieved initial results, and systemic risks from debt were relatively low. It said that, in absolute terms, China's debt level was not high compared to the likes of the US and UK.

Systemic risk is relatively low

The NDRC statement added, “China's debt is mostly domestic and our leverage is supported by a high deposit rate (at around 50 per cent), so the possibility to trigger systemic risks is relatively low.”Just over a year ago, Moody’s lowered China’s credit-rating outlook from stable to negative because of rising debt, falling currency reserves and uncertainty over the government's ability to carry out reforms.

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Karishma Vaswani, the BBC's Asia business correspondent, commented, “This is the first time that Moody's has cut its investors ratings on Chinese debt in more than 25 years, so it's pretty significant. But it's not the first time that international institutions have sounded alarm bells about China's rising debt levels. That's been going on for the last few years.“What this ratings downgrade on China's debt boils down to is whether you fundamentally believe the Chinese government has the ability to write this debt off or not. Or does it somehow have an ability to extend infinite credit lines, or at least reduce debt levels? And can it do that whilst trying to maintain strong economic growth figures?“Moody's has obviously come down on the side of the naysayers.”For related news and features, visit our International Assignments section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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