Published: Fri, May 26, 2017
Economy | By Melissa Porter

China's stocks, Yuan erase losses triggered by Moody's downgrade

Financial Secretary Paul Chan said he strongly disagreed with the rating agency's decision to "mechanically downgrade" Hong Kong's local currency and foreign currency issuer ratings by one notch to Aa2 from Aa1 shortly after cutting China's rating on Wednesday.

Moody's on May 24 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".

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.

China's potential economic growth was likely to slow toward 5 percent in coming years, but the cooldown is likely to be gradual due to further doses of fiscal stimulus, Moody's said.

It's "absolutely groundless" for Moody's to argue that local government financing vehicles and state-owned enterprise debt will swell the government's contingent liabilities, according to a statement released by the Ministry of Finance.

Echoing the ministry, the National Development and Reform Commission (NDRC), China's top economic planner, said Wednesday that deleveraging, as a major task of the country's supply-side structural reform, was making progress and China's debt risks were controllable.

As noted by The Wall Street Journal, this latest downgrade will likely increase the cost of borrowing for Chinese firms, with the revision of China's rating likely to have a knock-on effect on the country's banks.

China's economy has for always been fuelled by economic stimulus and cheap credit and the government thereis now grappling with ways to steer the economy clear of a debt crisis as growth slows.

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

Moody's also changed the outlook for China to stable from negative, saying the now stable outlook reflected the assessment that risks were balanced.

Moody's cited the likelihood of a "material rise" in economy-wide debt and the burden that it will place on the state's finances.

He also said the Belt and Road initiative will help Hong Kong businesses enter new markets, boosting the city's economy, adding China is also a "key source of growth" for the global economy.

"The first stage impact is that once the sovereign rating is downgraded, it is likely that most Chinese banks will have to be downgraded as well", Ballard says.

China has reacted angrily to Moody's downgrade of the country's credit rating from double-A-3 to A-1.

Markets have been shocked by announcement initially, sending commodities and Asian currencies down.

The other two main credit-rating agencies, Standard and Poor's and Fitch have kept their outlook for China steady at AA- and A+ respectively.

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