For the first time in almost three decades, Moody’s Investors Service has cut China’s credit score, from Aa3 to A1, following concerns over a slowdown in economic growth while debt has been rising. At the same time, it changed its outlook from ‘negative’ to ‘stable’, reversing a decision taken in March last year.
The agency said, ‘The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.’
‘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,” the statement added.
The last time Moody’s cut China’s credit rating was in November 1989, after the bloody end to the protests in Tiananmen Square which sent ripples across the globe.
Reacting quickly to the downgrade, China’s finance ministry posted a statement on its website saying ‘the decision overestimated the difficulties in the Chinese economy, while underestimated the ability of the Chinese government to deepen supply-side reforms and reasonably expand total demand.’
The reaction failed to calm the stock markets where Chinese shares saw a quick selloff, or the currency markets.
The downgrade comes at a time when China has been planning to allow foreign investors easier access to the mainland market through a bond connect program with Hong Kong.
