China’s credit rating has been downgraded for the first time in more than 30 years over fears that slowing growth and rising debts will weaken the world’s second largest economy.
Moody’s lowered China’s sovereign credit rating by one notch to A1 from Aa3, putting it in the same league as countries such as Japan and Israel. The outlook was raised to stable from negative.
“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,” the rating agency said in a statement.
It was China’s first ratings cut since 1989, the same year as the Tiananmen Square protests. The move is likely to modestly increase the cost of borrowing for Beijing and state-owned organisations, but it remains comfortably within the investment grade rating range.
Moody’s negative view weighed on Asian markets and China’s currency on Wednesday, but the report was dismissed by China’s finance ministry, which accused Moody’s of overestimating the risks facing the economy.
“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.
Economic growth growth in China slowed to 6.7% in 2016 from 6.9% in 2015, the weakest growth since 1990.
Moody’s said China’s economic growth was likely to slow to about 5% in the coming years, adding that the slowdown would probably be gradual because Beijing is expected to prop up the economy with more stimulus measures such as relaxing lending criteria.
Government stimulus has been a key driver of growth in recent years, but it has also led to a sharp rise in credit and debt levels.
“Our GDP will keep medium- and high-level growth and that will provide fundamental support to fend off local government debt risks,” China’s finance ministry said. “China’s government debt risks will not change dramatically in the period of 2018-20 from 2016.”