Moody's Slashes China Debt Rating

Moody's Slashes China Debt Rating

Moody's Investors Service reduced China's sovereign credit rating on Wednesday, citing the country's rising debt and slowing economy. The ratings agency also changed its outlook for China to stable from negative.

Moody's expects economic growth to decline to close to 5 percent over the next five years.

Moody's added that the reform programme is likely to slow rather than prevent increasing leverage.

"China's economy made a good start in the beginning of this year, showing that the results of the reforms are manifesting", the Ministry of Finance said in a statement posted on its official website.

China's debt-to-GDP ratio is more than 250 per cent, one of the highest in the world, "reflecting attempts by Beijing to continue pump-priming its economy and maintain growth and job creation as millions move from the countryside to make their fortunes in the cities", says Sky News.

China's total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160 per cent in 2008, according to Bloomberg Intelligence. In March of previous year, it cut China's outlook to negative from stable.

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Chinese economic growth fell from 14.2 percent in 2007 to 6.7 percent past year, though that still was among the world's strongest.

Moody's said Beijing's economic reform program won't suffice to offset the rising debt level, given the authorities' tendency to use debt-fueled stimulus to spur growth.

In February this year, state-run Xinhua news agency has quoted China Banking Association as saying that the country s bad loans totalled to a whopping Dollars 220 billion last year. "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".

According to China's laws on guarantee and budget, local government contingent liabilities include no more than the guaranteed debt they issue using loans from foreign governments or worldwide organizations. Moody's rating places China on par with countries such as Japan, Saudi Arabia and Estonia.

ANZ, on the other hand, said, "Downgrade (s) by rating agencies could potentially erode the financial soundness of China, creating the risk of a negative feedback loop", and: "The downgrade will likely lift the cost of financing of Chinese issuers, especially in the offshore market". But, with an excessive leverage of the financial system, it would be hard for China to keep growth rates above the target of at least 6.5 per cent.

Sun Binbin, chief analyst with TF Securities, believes the downgrade showed that Moody's "does not quite understand China's development pattern and path".

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