Rating agency Moody’s Investors Service downgraded China’s credit rating.

This is the first time since 1989. A one-level downgrade, to A1 fromthe previous Aa3, occurs as the Chinese government struggles with the challenges of rising financial risks stemming from years of credit-fueled stimulus. Moody’s also changed the outlook for China from negative to stable.

China’s GDP is predicted to advance to its lowest level since theglobal financial crisis. This hap- pened in part due to the withdrawal of the stimulus provided by the Chinese government. As is known, the Government of China is currently tightening the growth rate of loans, in order to anticipate the domestic debt bubble. ”The downgrade reflects Moody’s forecasts that China’s financial strength will be eroded over the next few years, with rising debt and a potential slowdown in growth”, Moody’s said in a statement.

”Seeing how seriously the Chinese government is severely limiting the emergence of financial risks, it is not impossible if the GDP next year will be lower than 6.5% ”, said Louis Kuijs, an economist at Oxford Economics in Hong Kong.

China’s need to reach official GDP targets will make the economy increasingly dependent on stimulus.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government”, Moody’s said.

Beijing is also likely to be under pressure if it lets the yuan depreciate to support export. The rea- son is that the policy will repeat the phenomenon of capital flight that occurred in 2016, which pushed the national reserves of the country under US$3 trillion at the beginning of this year. In addition, the yuan depreciation policy will also attract criticism from the international world, especially the US. According to Kuijs, the only way that the current Chinese government can support economic growthis by spurring consumer spending. However, China’s consumer spending currently tends to steady and has not shown a significant rise.

”People’s consumption is very stable, unlike in the United States where consumption by itself can drive theeconomiccycle, Iwouldarguethatin China, consumptionwillnotbetoosupportiveofthenational economy”, he said.

The downgrade will increase borrowing costs for the Chinese government and state-owned en- terprises (SOEs) moderately, but China remains within the investment grade range. Chinese leaders have identified financial risk containment and asset bubbles as a top priority this year. However, authorities have moved closely to avoid the economic downturn, cautiously raising short-term interest rates while tightening regulatory oversight.

”This will be very negative in terms of sentiment, especially when China wants to lower the risk of the banking system, and also when there will be some potential restructuring of SOEs”,said Vishnu Varathan, Asia head of economics and strategy at Mizuho’s Treasury division.

China’s Ministry of Finance said the downgrade stems from an overvalued assessment of the risks to the economy, and is based on improper methodology.

”Moody’s views that China’s non-financial debt will rise rapidly and that the government will con- tinue to maintain growth through stimulus measures looks to exacerbate the difficulties facing the Chinese economy, as well as are underestimating the Chinese government’s ability to deepen supply- side structural reforms and expand aggregate demand appropriately”,the ministry said in a statement.


According to Moody’s (source https://www.moodys.com), the stable outlook denotes broadly balanced upside and downside risks. Evidence that structural reforms are effectively stemming the rise in leverage without an increase in risks in the banking and shadow banking sectors could be positive for China’s credit profile and rating.

Conversely, negative rating pressures could stem from leverage continuing to rise faster than we currently expect and continuing to involve significant misallocation of capital that weighs on growth in the medium term. In particular, in this scenario, the risk of financial tensions and contagion from specific credit events could rise, potentially to levels no longer consistent with an A1 rating.


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