Published: Sat, May 27, 2017
Economy | By Melissa Porter

Experts say Moody's downgrading of China's credit rating shows miscalculations

Moody's Investor Services today announced a downgrading of China's credit rating to a negative A1 from a stable Aa3, the first time in almost 30 years, over concerns of weakening of the financial strength of the world's second-largest economy.

The move comes as China tries to clean up a toxic brew of unregulated and risky lending that has for years fueled the economy's spectacular growth, although some analysts doubt Beijing's willingness to quit its debt addiction.

Earlier on April 9, 2013, Fitch Ratings downgraded China's long-term local currency rating to A+ from AA-, the first sovereign rating cut since 1999.

This is for the first time in last twenty five years that the American agency has gone for such rating downgrade.

Chinese officials have said that Moody's analysis is based on the use of an "inappropriate methodology".

Communist leaders have cited reducing financial risk as a priority this year.

Though progressing reforms are likely to change the economy and financial system over time, they might not stop rising debt or the consequent growth in contingent liabilities for the government, according the agency. Moody's believe growth will slow down further in the region of 5%.

The Chinese finance ministry insisted the country's growth rate had edged up to 6.9% in the first quarter of 2017.

The ratings of the firms, which are ultimately owned by the government, were revised down by one notch, Moody's said in a statement.

HONG KONG (AP) - Moody's decision to cut its credit rating for Hong Kong soon after downgrading its China rating on worries about rising debt levels drew an objection Thursday from the business hub's financial chief.

The credit rating agency warned that the financial strength of the world's second-biggest economy is likely to deteriorate in the coming years as growth slows and national debt continues climbing. In my view, it is likely that, like most of other analyses on China's debt risk, the Moody's analysis has confused China's private-sector obligations with public-sector debt.

The ministry also refuted Moody's expectation that China's government debt-to-GDP ratio would rise to 40 percent in 2018.

Fears are mounting that China is flirting with a potential disaster worse than the United States sub-prime collapse that sparked the global financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade". "External debt in China is just 13% of GDP, so reliance on foreign lenders is limited", said Botham.

As a outcome, notwithstanding the moderate general government budget deficit in 2016 of around 3 per cent of GDP, the government's direct debt burden is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%) and higher than the median of Aa-rated sovereigns (36.7%).

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