Moody’s investor Service on Wednesday cut China’s sovereign credit rating for the first time since 1989, citing that the outlook of the financial strength in the world’s second largest economy will worsen in the coming years as economy growth slows and debt continues to increase.
Moody’s downgraded China’s credit rating to A1 from Aa3 and changed its outlook to stable from negative.
"The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced," Moody’s said in the statement Wednesday. "The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account."
The Chinese stocks fell in the early trading after the news. But it pared its losses in the afternoon. The yuan didn’t react much on the news.
China’s finance ministry replied on the Moody’s move and didn’t agree with the cutting. It said that the ratings company underestimated the government’s ability to boost demand and it also overstated the difficulties.
“Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.