China has received a downgrade on its credit score, on worries about the future state of the economy.
Moody’s Investors Services brought down China’s long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3.
But China’s finance ministry said Moody’s was exaggerating the mainland’s economic difficulties and underestimating reform efforts.
The downgrade could raise the cost of borrowing for the Chinese government.
The ratings agency also changed its outlook for China to stable from negative.
Moody’s said in a statement that the downgrade reflected expectations that China’s financial strength would “erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows”.
The Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990.
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.
In its statement it points to slowing Chinese growth and rising debt levels to keep the economy growing. It also says that reforms may take a backseat to growth priorities.
Remember – this is a critical year for President Xi Jinping, who faces a key political congress towards the end of the year. A strong economy gives him credibility and legitimacy – China observers tell me that the perception of stable growth is crucial for him at this time.
This is why negative assessments from international financial institutions like Moody’s on Chinese debt are unlikely to go down well in Beijing.
Currently, China’s debt stands at something like 260% to GDP. Higher debt levels usually mean a higher level of risk.
But it is worth noting that most of this debt is held by Chinese state-owned enterprises or “quasi-state” like entities – not international investors – so it is less likely to have a spill over effect into other economies.
All the same, as the world’s second largest economy, what happens in China matters to the rest of the world.
China’s Impact On Global Economy
China is the world’s second-biggest importer of both goods and commercial services.
It also plays an important role as a buyer of oil and other commodities, and its slowdown has been a factor in the decline in the prices of such goods.
Beijing’s aim to rebalance the economy towards domestic consumption has led to major challenges for large manufacturing sectors, and there have been layoffs – especially in heavily staffed state-run sectors such as the steel industry.
The downgrade comes as Beijing has been making efforts to clean up its lending practices, which have been viewed as a threat to financial stability.
– BBC
