Published: Wed, May 24, 2017
Worldwide | By Gretchen Simon

China's credit rating downgraded over debt concerns


China's yuan currency in the offshore market CNH=D3 dipped almost 0.1 percent against the USA dollar after the ratings agency announced its decision.

"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. Total outstanding credit climbed to about 260 per cent of GDP by the end of 2016, up from 160 per cent in 2008, according to Bloomberg Intelligence.

The move could lead to a rise in the cost of borrowing for the Chinese government and state-owned enterprises. Moody's said it expects China's economic growth potential to decline to around 5 percent over the next five years because of three reasons.

It said that the recent focus on capital outflows has constrained the development of domestic capital markets by restricting the cross-border flows of capital.

It noted that the financial sector remained under-developed despite recent reforms.

Those warnings were followed by the International Monetary Fund which in October 2016 said China urgently needs a plan to address a build up of corporate debt that is manageable and that the window to address it "closing quickly".

But Moody's shifted to a stable outlook, from negative, citing balanced risks.

Tornado watch issued for area
Along with the tornado watch, severe storms and heavy rain are possible in the area through Wednesday, according to the NWS. A Tornado Watch means conditions are favorable for tornadoes and severe thunderstorms in and close to the watch area.

The government's control of much of the economy, the financial system and cross-border capital flows offers the ability to maintain stability in the near term, Moody's said.

SHANGHAI May 24 Moody's Investors Services has no specific timetable for re-visiting China's rating after its downgrade on Wednesday, but would monitor conditions on a regular basis, said Marie Diron, associate managing director of Moody's Sovereign Risk Group. S&P's AA- rating is one notch above both Moody's and Fitch Ratings' A+ rating.

"This news is a clear China negative in our view (even though the rationale for the downgrade contained nothing new)", Macquarie said in a note on Wednesday.

The Aussie fell as much as 0.3 percent to $0.7455 while the yuan slipped to 6.8901 per US dollar, 0.1 percent below late USA levels after Moody's downgraded China to A1 from AA3.

"The timing of the downgrade came as a surprise", said Sandra Chow, senior analyst at CreditSights in Singapore.

"Everyone on the planet has flagged the risk of Chinese debt and the risk that is associated with the current policymakers' strategy and attempt to deleverage".

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