China downgraded

Moody’s Investor Service, the international credit rating agency, has downgraded China’s credit rating to A1 from Aa3, the first downgrade since 1989, reports Reuters.

The credit downgrade comes amid fears of mounting debts, where China has 277 per cent total debt to GDP ratio as well as slowing growth, currently running at 6.6 per cent for Q2 2017, compared with a 14.2 per cent high in 2007.

Ratings rival Standard & Poor’s has kept China’s credit rating at AA-, a notch above Moody’s score and Fitch’s China rating, a grading which yet might be revised in near future.

Shankar Narayanaswamy, Head, Credit Strategy & Financials at Standard Chartered Bank in Singapore, said in a research note ‘While the timing was slightly surprising, Moody’s downgrade of China’s sovereign rating to A1/Sta was not unexpected. China’s slowing growth and debt sustainability issues are well flagged, and most investors expected a downgrade at some point. Moody’s and S&P have had a negative outlook on the sovereign for close to 14 months’.

The ratings change means that China will find it more expensive to borrow in international credit markets – a problem that will not worry Beijing anytime soon given China’s $US3 trillion FX reserves and strong domestic investor base.

China’s rating agencies China Chengxin Credit Rating Group and Dagong Credit Rating Agency, who rate national borrowers, are credit benchmarks in China and limit the relevance of US agencies Moody’s, S&P and Fitch for domestic issuers and investors in Chinese securities.

However, falling commodity prices, an over-heated housing market and a growing consumer credit bubble, will all weigh heavily on growth and are major warning signs for the economy. Increased leverage in the state banking sector with a growing portfolio of non-performing loans could potentially trigger a credit crisis, the People’s Bank of China warned last month.