Business

Moody's cuts China's credit rating for first time since 1989

People walking past a mall with shopping bags in Beijing. Dec 2014 Image copyright Getty Images

China's credit rating has been cut over fears that growth in the world's second-biggest economy will slow in the coming years.

Moody's, one of the world's big three ratings agencies, cut China by one notch to A1 from Aa3.

It was the first time the agency has downgraded the country since 1989.

China's finance ministry said Moody's was exaggerating the mainland's economic difficulties and underestimating reform efforts.

The downgrade could raise the cost of borrowing for the Chinese government.

The ratings agency also changed its outlook for China to stable from negative.

Moody's said that the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows".

The other two main credit rating agencies have so far left their evaluations unchanged.

Standard & Poor's rating for China currently stands at AA- with a negative outlook, while Fitch's rating is A+ with a stable outlook.

The Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990.


Analysis

Image copyright Getty Images

By Karishma Vaswani, Asia business correspondent

This is the first time that Moody's has cut its investors ratings on Chinese debt in more than a quarter of a century, so it is pretty significant.

However, it is not the first time that international institutions have sounded alarm bells about China's rising debt levels. They have been going off for the past few years.

What this ratings downgrade on China's debt boils down to is whether you believe the Chinese government has the ability to write off this debt. Does Beijing somehow have an ability to extend infinite credit lines, or at least reduce debt levels? And can it do so while trying to maintain strong economic growth figures?

Moody's has obviously come down on the side of the naysayers.

In its statement it points to slowing Chinese growth and rising debt levels to keep the economy expanding. It also says that reforms may take a backseat to growth priorities.

Remember: this is a critical time for President Xi Jinping, who faces a key political congress towards the end of the year. A strong economy gives him credibility and legitimacy - and China observers tell me that the perception of stable growth is crucial for him at this time.

This is why negative assessments from international financial institutions such as Moody's on Chinese debt are unlikely to go down well in Beijing.

China's debt stands at something like 260% to GDP. Higher debt levels usually mean a higher level of risk.

But it is worth noting that most of this debt is held by Chinese state-owned enterprises or "quasi-state" like entities - not international investors - so it is less likely to have a spillover effect into other economies.

All the same, as the world's second-largest economy, what happens in China matters to the rest of the world.

China's impact on global economy


China is the world's second-biggest importer of both goods and services.

It also plays an important role as a buyer of oil and other commodities, and its slowdown has been a factor in the decline in the prices of such goods.

Beijing's aim to rebalance the economy towards domestic consumption has led to major challenges for manufacturers, and there have been layoffs - especially in heavily staffed state-run sectors such as the steel industry.

The downgrade comes as Beijing tries to clean up its lending practices, which have been viewed as a threat to financial stability.

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