China Economy

China’s rising debt to blame for Moody’s downgrade, says credit rating agency

If China uses a stimulus policy to meet economic growth targets, financial leverage is likely to grow, a Moody’s executive told a Beijing briefing

PUBLISHED : Wednesday, 14 June, 2017, 9:47am
UPDATED : Wednesday, 14 June, 2017, 10:50pm

China’s financial leverage likely will keep increasing as long as the country relies on a stimulus policy to meet its economic growth targets, a Moody’s Investor Service executive told a Beijing briefing on Tuesday, defending the agency’s decision to downgrade China’s credit rating last month.

The rise of debt in China, notably pertaining to local government financing vehicles and state-owned enterprises, was a primary reason why the rating agency said it was downgrading China’s sovereign rating for the first time since 1989, a move that displeased Beijing.

“Growth and stability are still the primary objectives,” said Marie Diron, associate managing director of the Moody’s sovereign risk group. “That means that leverage could continue to rise, probably slower than we saw in the past, but continue to rise.”

In Beijing’s official rhetoric, the Chinese government has its financial and debt risks under control, and it has ended an all-out stimulus policy. China’s finance ministry in a statement earlier criticised Moody’s for having what it called a limited understanding of the country’s domestic situation.

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

The finance ministry said on Tuesday that in the months to come, it will sell its first US dollar denominated sovereign bonds since 2004, along with yuan bonds. The move would mark China’s first overseas issuance of national debt since Moody’s downgrade of the sovereign credit rating in May. The bonds will be sold in Hong Kong to test international investors’ appetite for Chinese government debt.

China’s annual economic growth rate is expected to slow to 5 per cent by 2020 from targeted growth of 6.5 per cent this year, owing to China’s aging population and falling marginal output from investment, according to Moody’s.

“The gap between the potential and actual growth will give rise to more contingent debts,” Diron said on the sideline of the agency’s mid-year conference in Beijing. “Many debts could migrate to the government’s balance sheet.”

Chinese authorities have put local government debt at 16 trillion yuan (HK$18.31 trillion), revised the budget law to regulate local borrowing and launched a debt swap to lower the interest burden. But these measures will “slow the pace of increasing debt in the economy, but not reverse it at all”, Diron said.

China’s overall debt to gross domestic product, an indicator of financial leverage, rose to 261 per cent in 2016 from 252 per cent a year earlier. Corporate leverage, especially for state companies, is particularly high after years of debt accumulation.