Moody’s downgrades China, expecting financial strength to erode as debt rises

The firm trimmed its rating for the country’s sovereign debt by one notch from A1 to Aa3 – a move that could make borrowing more expensive for China and one that has been rejected by the country’s finance ministry.

“Moody’s expects that economy-wide leverage will increase further over the coming years”, it said, adding that China’s reform program was is likely to slow, but not prevent, the rise in leverage.

After India, China has now taken on the global credit rating agency Moody’s for downgrading its credit ratings.

The Chinese Finance Ministry, sure enough, is disputing the Moody’s verdict, and China’s tightly insulated domestic markets have shrugged off the demotion.

China’s top leadership has identified the containment of financial risks and asset bubbles as a top priority this year.

Moody’s said China’s financial strength was likely to erode as growth slows and debt rises further. The outlook was raised to stable from negative.

At the same time, Moody’s has changed to stable from negative the rating outlooks of 24 out of the 26 GRIs and rated subsidiaries. The index had also underperformed the market in past one quarter, dropping 6.59% as against Sensex’s 5.1% rise.

Moody’s also cast doubt on the effectiveness of China’s reform plans, although it said the government’s commitment was “clear”.

China stocks fell and the yuan weakened Tuesday after Moody’s Investors Service lowered the credit rating for the world’s second-largest economy amid concerns for rising debt levels and slowing growth.

China’s authorities dismissed the ratings cut, saying Moody’s was exaggerating the country’s economic difficulties and underestimating reform efforts.

However, according to the IMF, while state-owned debt is high, China’s external debt is relatively low by worldwide standards.

Moody’s also claimed that increases in China’s local government financing platforms and debt owed by SOEs would lead to rising government contingent liabilities.

The UK’s creditworthiness is now assessed as Aa1 by Moody’s, which is its second-strongest credit rating. “But the two ratings, like the two regions, remain closely linked”, the bond credit rating business said in its statement.

“In recent years, rating agencies have maintained India’s BBB- rating, notwithstanding clear improvements in our economic fundamentals (such as inflation, growth, and current account performance)”, India’s Chief Economic Advisor Arvind Subramanian said, PTI reported. While Beijing did acknowledge that it has built up a lot of debt, the Chinese government said it is confident that it can contain those risks.