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30 May 2017, 06:31 | Vickie Mathis
Stocks across Europe are dipping after China's rating cut
China's Finance Ministry said the downgrade, Moody's first for the country since 1989, overestimated risks to the economy and was based on "inappropriate methodology".
It attributed the move to expectations that China's economy-wide leverage would increase over the coming years, planned reform program would likely slow, but not prevent the rise in leverage, and sustained policy stimulus would cause rising debt. In March 2016, Moody's revised down China's sovereign rating outlook to "negative", but China's economic performance turned out to be much better than projected.
Moody's, the credit rating organisation, has downgraded China's credit rating for the first time in more than 25 years due to concerns over the slowing growth and rising debt of the Chinese economy.
Third, Moody's conclusion that rises in commercial bank loans, bonds issued by Local Government Financing Vehicles, as well as investments by State-owned enterprises will lead to increase in indirect and contingent liabilities.
"We expect the government's direct debt burden to rise gradually toward 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade", it said.
The move comes as China tries to clean up a toxic brew of unregulated and risky lending that has for years fueled the economy's spectacular growth, although some analysts doubt Beijing's willingness to quit its debt addiction.
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.
At the same time, Moody's has changed to stable from negative the rating outlooks of 24 out of the 26 GRIs and rated subsidiaries.
China's total outstanding credit surged to 260 percent of GDP by the end of a year ago and the International Monetary Fund has warned that a debt crisis in the country could "imperil global financial stability".
Meanwhile, growth in the world's second largest economy has dropped from 14.2% in 2007 to 6.7% a year ago.
The downgrading of the China's credit rating has anxious the metal investors globally and domestically.
After India, China has now taken on the global credit rating agency Moody's for downgrading its credit ratings.
"Moody's has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has", Financial Secretary Paul Chansaid in a statement.
The downgrade places China in the same credit rating bracket as Saudi Arabia, Japan and Israel. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.
In 2013, Fitch Ratings downgraded China's debt to A+ (the same as Moody's current rating), while the S&P gives China a slightly higher rating of AA-. But, with an excessive leverage of the financial system, it would be hard for China to keep growth rates above the target of at least 6.5 per cent.
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