Moody's downgrades China's credit rating

In a statement released Wednesday, Moody's said it had downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

"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", Moody's said in the statement.

Moody's changed Hong Kong's outlook to stable from negative, denoting that the risks to the city's rating are balanced.

However, Liao said the move "makes no sense", because China's growth has improved from past year and the threat of trade protectionism from US President Donald Trump's administration has subsided. It is estimated that if one were to add various forms of debt, including regional, the figure looks more like 260% of GDP.

The ministry stated that it is rejecting Moody's decision to downgrade its credit rating, claiming that the organization used an "inappropriate" method to assess the risks facing the world's number two economy.

In the short-term at least, this is likely to centre on fiscal policy and increased spending by the government and its related entities.

Moody's reasons that though India's debt-to-GDP ratio has come down to 66.7 per cent from its peak at 84 per cent in 2003, interest payments take away one-fifth of the government's revenue.

The move indicates a higher perceived risk associated with Chinese sovereign bonds and therefore, it could increase the cost of state borrowing in the global money market.

"We saw knee-jerk declines in China's stocks and offshore CNH, but the overall impact was limited". The evaluations were partly decided by "the rating or credit quality of government providing support", it said.

For some China watchers, the downgrade is no surprise.

"It seems that regulators do not want the Shanghai benchmark to fall below 3 000, so when the index is close to that level, they will start buying for stability", said Castor Pang, strategist at Core-Pacific Yamaichi HK in Hong Kong.

The downgrade - the first by Moody's since the aftermath of the Tiananmen Square protests almost 30 years ago - prompted Beijing to accuse the ratings agency of "inappropriate methods" and triggered an initial sell-off in Chinese stocks.

The official onshore yuan traded a little weaker at 6.8909 yuan to the dollar after softening as much as 0.1 percent following the downgrade. But it is worth noting that most of this debt is held by Chinese state-owned enterprises or "quasi-state" like entities - not worldwide investors - so it is less likely to have a spillover effect into other economies.

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