23 February 2019
China's planned reform program is unlikely to prevent a rise in economy-wide leverage, says Moody's. Photo: Bloomberg
China's planned reform program is unlikely to prevent a rise in economy-wide leverage, says Moody's. Photo: Bloomberg

Moody’s downgrades China rating amid debt worries

Moody’s Investors Service downgraded China’s sovereign rating for the first time in nearly 30 years, citing potential further slowdown in the economy and financial risks from years of credit-fueled expansion.

The ratings agency announced on Wednesday that it has cut the long-term local and foreign currency issuer ratings of Asia’s largest economy by one notch, to A1 from Aa3.

“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 a statement, changing its outlook for China to stable from negative.

Wednesday’s move marked Moody’s first downgrade for China since 1989, according to Reuters.

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

“The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”

While economic expansion will remain relatively high, growth rates are likely to fall in the years ahead, the ratings agency said.

According to Moody’s, China’s debt burden could rise toward 45 percent of gross domestic product (GDP) by the end of the decade.

Following Moody’s announcement, China’s finance ministry said it doesn’t agree with the rating cut.

In a statement, the ministry said the downgrade was based on an “inappropriate method” and that Moody’s overestimated the difficulties China’s economy faced, Reuters reports.

“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said.

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