Published: Tue, May 30, 2017
Business | By Pat Ferguson

China's Credit Rating Down After 30yrs

China's Credit Rating Down After 30yrs

Moody's Investors Service on Wednesday downgraded China's sovereign debt one notch to A1, the agency's fifth-highest rating.

Moody's Investors Service downgraded China's sovereign credit rating for the first time in almost 30 years, for fear that Beijing will prove unable to tame the nation's mounting debt while also keeping the economy on a steady growth trajectory.

Though progressing reforms are likely to change the economy and financial system over time, they might not stop rising debt or the consequent growth in contingent liabilities for the government, according the agency.

Moody's lowered China's credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and uncertainty over authorities' ability to carry out reforms.

However, Moody's said it expects China's growth potential to decline to close to 5 percent over the next five years, citing diminishing investment, an accelerated fall in the working-age population and a continuing dip in productivity.

As a outcome, Moody's expects the government's direct debt burden to rise slowly towards 40% of GDP by 2018 and closer to 45% by the end of the decade, while other fiscal risks will rise from issues including high levels of off-book local government borrowing.

However observes believe runaway credit has accumulated to such an extent that these measures will be insufficient and the government will have to step in, leading to a leap in public debt levels. The finance ministry rejected the assessment, saying Moody's had used an "inappropriate" method to assess the risks facing the economy.

On the debt front, China's total and private debt is reported to be worth more than 250 per cent of GDP. In March of a year ago, it cut China's outlook to negative from stable.

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"China's economy is expected to maintain steady and relatively fast growth thanks to the deepening reforms in state-owned enterprises, finance, taxation and pricing, in addition to the implementation of the Belt and Road Initiative", the MOF said.

GDP growth has decelerated in recent years from a peak of 10.6 per cent in 2010 to 6.7 per cent in 2016.

However, China may see in Western agency credit ratings alarms for risk controls.

It last downgraded the country in 1989.

For example, in 2007, their ratings for emerging market economies were between 8 and 12 grades lower than those developed countries with similar debt levels, Cheng Weili, deputy research fellow with the economic outlook section of China's State Information Center, told Xinhua. Fitch's current rating for the country, A+, is its fifth-highest.

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

Moody's further contended that "a resolution to the banking sector's bad loan problems was "unlikely" in the near-term", the report said.

The downgrade will have an impact on the cost of borrowing for China's government and its SOEs.

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