Chinese Stocks Drop to Seven-Month Low After Moody's Downgrade

Posted May 30, 2017

Fund managers have said last night's downgrade of China's debt by credit ratings agency Moody's was "no surprise" and the immediate market impact will be limited, although they have warned about the longer-term implications for investor confidence. Moody's also changed its outlook on China to stable from negative after revising the outlook to negative from stable in March 2016.

In a statement released in the wake of the Moody's, the Chinese finance ministry defended the Chinese economy and said the first quarter of the year had seen steady growth with better-than-expected economic indicators.

Moody's Investors Service yesterday slashed China's credit rating for the first time in nearly three decades, citing concerns about the country's rising debt and slowing growth, but Beijing rejected the downgrade as "inappropriate". Increased cost of borrowingThe downgrade could marginally raise the cost of borrowing for the Chinese government at a time when the Peking regime tries to implement reforms aimed at curbing rising financial risks after years of credit-fuelled stimulus.

The agency lowered China's sovereign rating by one notch to A1 from Aa3, putting it in the same category as countries such as Japan and Israel.

However, "it is not the first time that global institutions have sounded alarm bells about China's rising debt levels". Private sector analysts say it could drag on the economy or threaten the health of the state-owned banking industry.

Chinese Stocks Drop to Seven-Month Low After Moody's Downgrade

Chinese leaders have identified the containment of financial risks as a top priority this year, but are moving cautiously to avoid choking economic growth.

"The institutional features which grant Hong Kong, at present, a degree of political and economic independence together with the SAR's (Special Administrative Region) intrinsic credit strengths, allow Hong Kong's rating to exceed that of China". In addition, China's onshore yuan liquidity conditions will likely turn more volatile and tighten next month by taking into account the central bank's MPA assessment approaching the half-year end.

"The planned reform program is likely to slow, but not prevent, the rise in leverage", Moody's said. Beijing is aiming for growth of around 6.5% for the year, the lowest target in over two decades. "The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus". The move, it said, reflects an expectation "China's financial strength will erode somewhat" and economy-wide debt will rise.

China's finance ministry insisted the country's GDP would continue to grow at medium to high levels " and that will provide fundamental support to fend off local government debt risks".

The Chinese economy expanded by 6.7 per cent in 2016 compared with a peak of 10.6 per cent in 2010. In addition, Moody's expressed that despite the decline, at an A1 rating level the risks can still be balanced.