Moody’s downgrades China’s debt rating
By
Nick Beams
26 May 2017
The downgrading of Chinese sovereign debt by the credit rating agency Moody’s has underscored the dilemmas facing the regime of Xi Jinping as it tries to maintain economic growth on the one hand and comply with the demands of international financial capital to reduce its debt levels and open up its financial system on the other.
On Wednesday Moody’s reduced its rating of Chinese debt by a notch from Aa3 to A1, its fifth highest rating, in the first such downgrade since 1989. At the same time, it softened the blow somewhat by changing its outlook from “negative” to “stability.”
The news, which initially saw a fall in markets before they staged a recovery, brought an immediate reaction from the Chinese finance ministry. It stated Moody’s had “overestimated the difficulties faced by China’s economy and underestimated the government’s ability to deepen reforms.” The agency, the foreign ministry continued, had not given sufficient credit for the “steady upward momentum” for growth, with stronger than expected results in the first quarter, and the year’s “strong beginning” showing the “achievement of China’s reforms.”
In its statement on the downgrade, Moody’s said that economy-wide debt, which includes that of state-owned enterprises, would continue to rise, notwithstanding reforms to the financial system, as the growth potential of the Chinese economy slowed.
“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.”
It said the government’s direct debt burden would rise to…