Renminbi Series: China suffers one notch downgrade from Moody’s

The rating agency Moody’s has downgraded China’s sovereign credit rating from Aa3 to A1, which is the fourth highest rating in Moody’s credit scale. After the downgrade, it changed the outlook from negative to stable. Marie Diron, senior vice president at Moody’s sovereign rating group said that there were combinations of factors behind the decision highlighting investor concerns over the country’s rising debt and the slow pace of economic reforms intended to transform its growth model.

Moody’s became the second of the top three rating agency to downgrade Chinese debt to the fourth highest rating on the credit scale. The first one was Fitch, while the Standard & Poor still rates China third highest in the credit scale with a negative outlook. Speaking of the downgrade, Marie Diron wrote, “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.”

Moody’s expects China’s direct fiscal debt to reach 40 percent of gross domestic product by the end of next year and 45 percent by 2020. In addition, it notes that China’s reliance on disguised fiscal spending through off-budget special purpose vehicles owned by local governments is likely to persist.

As the news broke out, China’s benchmark stock index CSI 300 declined by more than 1 percent to trade as low as 3384, however, it has recovered somewhat and is currently trading at 3402, down 0.6 percent so far today. The rating had a minor impact on the yuan rate which is currently at 6.89 per dollar, down just 0.04 for the day.