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China dismisses Moody’s downgrade of China’s rating

RATING agency Moody's Investors Service downgraded China's rating to A1 from Aa3 today, citing worrying level of rising debts, while China's Ministry of Finance dismissed the decision later in a statement, saying that Moody's was exaggerating the country’s economic difficulties and underestimating reform efforts.

Moody's said earlier today that the downgrade of China's long-term local currency and foreign currency issuer ratings was out of the expectation of eroding Chinese financial strength, “with economy-wide debt continuing to rise and the potential growth slows.”

The downgrade came amid an intensified national campaign in recent months to rein in financial risks. The central bank has raised short-term interest rates several times by far this year, raising the costs for speculators betting against the yuan. Also, the banking regulator filed several detailed rules to crack down on the shadow banking business to defuse asset bubbles.

“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,” according to Moody’s.

“We expect the government's direct debt burden to rise gradually towards 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade,” it added.

The Ministry of Finance, however, issued a statement later today, saying the downgrade is based on the “pro-cyclical” rating approach which was "not appropriate."

The ministry said that China’s liability ratio of the government is standing at 36.7 percent to GDP by the end of 2016, lower than the European Union’s 60 percent and far below the level of other major economies and emerging markets.

“With the pushing of country’s supply-side reform and the control over government liabilities, the risk level of government debt profile won’t significantly change in 2018 to 2020 compares to the year 2016,” the ministry said.

The downgrade, which is the first time that rating agency cut its investor’s ratings on Chinese debt in more than 25 years, will likely lift the cost of financing of Chinese bond issuers. But many consider the decision has limited impact on market players, especially Chinese players in the offshore market.

“Theoretically, Chinese companies that issue offshore dollar bonds could bear pressure from the downgrade decision,” according to Liu Dongliang, a senior analyst at China Merchants Bank Co. “But as buyers of such bonds in most cases are Chinese financial institutions who have closer connections with the issuers, they are less sensitive on decisions made by rating agencies.”

Liu added that the downgrade could also influence future bond connect linking foreign investors to China’s US$9 trillion bond market, but the overall impact is expected to be limited.

Shanghai shares pulled back from initial falls following the downgrade, with the Shanghai Composite Index closed 0.07 percent higher, shrugging of a 1.3 percent drop earlier in the day.


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