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China Economy

China hits back at Moody’s for downgrading its credit rating

PUBLISHED : Wednesday, 24 May, 2017, 2:10pm
UPDATED : Wednesday, 24 May, 2017, 2:10pm

Hours after Moody’s Investors Service downgraded China’s credit rating, the nation’s finance ministry hit back with a statement on its website saying the rating agency overestimated the economic difficulties the country faces while underestimating Beijing’s capability in reforms.

The Chinese government’s quick response marked a sharp contrast to a year earlier. At a conference in March 2016, China’s former finance minister Lou Jiwei said Beijing didn’t “care too much” about ratings from international agencies when asked about a previous Moody’s change of China’s credit rating outlook.

Moody’s cuts China’s credit rating over worsening debt outlook

Moody’s surprised the market on Wednesday morning by downgrading China’s credit rating by one notch to A1 from Aa3, expecting further fragility in financial strength and increases in debt. It also changed the outlook for China to stable from negative.

The downgrade came as China is trying hard to woo foreign investors to put money into its onshore bond market. The downgrade is also a sign of doubts in Beijing’s management of debt and financial risks, even though China has shown signs of stabilising the economy and the yuan exchange rate.

The Ministry of Finance defended the potential for economic growth, saying a robust start for the economy this year indicated that reforms were taking effect.

Ongoing reforms in state-owned enterprises and finance, plus the government’s Belt and Road international trade initiative will also help the economy to grow steadily, the ministry said.

“The downgrade by Moody’s was based on inappropriate ‘pro-cyclical’ rating measure. Its views that the debt scale of the real economy will grow rapidly, that reforms are having difficulties showing effects and that the government will continue to stimulate growth, overestimated the difficulties China is confronting and underestimated the government capability in deepening structural reform and appropriately expanding aggregated demand,” the ministry said.

China’s April factory output and investment slow, as growth dials back

The ministry said that the scale of government debt will maintain reasonable growth and economic growth will give fundamental support to prevent local government debt risks.

“No big changes in government debt risk indicators will be expected in 2018 to 2020 from 2016,” the ministry said.

The ministry also said Moody’s judgement that China’s debt growth in local government financing vehicles and state-owned enterprises would increase the contingent liabilities for the government was “not valid”, indicating “some international agencies lack the necessary knowledge of China’s laws and regulations”.