Chinese stocks fall to seven-month low on Moody's downgrade

by Ben Pena May 30, 2017, 6:31

That's right Jihye Moody's says the downgrade is based on expectations that China's economy may erode in the coming years as growth slows and its debt burden continues to rise.

Moody's has cut its credit rating for Hong Kong hours after downgrading China for rising debt levels, which it said would have "significant impact" on the Asian financial hub due to their close links.

As a outcome, Moody's expects the government's direct debt burden to rise slowly towards 40% of GDP by 2018 and closer to 45% by the end of the decade, while other fiscal risks will rise from issues including high levels of off-book local government borrowing.

The government's direct debt burden, which is now at a modest level of less than 40% of GDP, is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%).

"China's economy made a good start in the beginning of this year, showing that the results of the reforms are manifesting", the Ministry of Finance said in a statement posted on its official website.

According to some data released by the Institute of International Finance, the total debt in the Chinese economy, which includes; government, households, and businesses peaked at 256% of economic output just before the year end last 2016.

Estimates of China's total nongovernment debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent previous year.

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Moody's, however, changed its outlook for Hong Kong to stable from negative, saying the government's vast cash pile can help the territory ward off financial and economic shocks.

China's growth a year ago, down from 6.9 per cent in 2015 - the slowest growth since 1990.

In downgrading Hong Kong, the agency outlined the growing links between the city and the mainland, with banks increasing China-related lending, while its stock market is also linked to bourses in Shanghai and Shenzhen through separate tie-ups. It is the first downgrade that Moody's have made on China since 1989.

The downgrading of the China's credit rating has anxious the metal investors globally and domestically.

Also, as per the report, India's revenues at 21 per cent of GDP are considerably lower than the median income of countries with the BAA ratings: 27.1 per cent. Broadly, China's commercial sector has a lower rating than the government.

The rating agency said late Wednesday that it's lowering its local currency and foreign currency issuer ratings by one notch to Aa2 from Aa1. "The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen", Moody's said.

"Our projections show that China would still be able to maintain (a growth rate) of around 6 per cent by 2020", he noted.


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