China stocks fall after rating cut, other Asian markets gain

Terrell Bush
May 24, 2017

With the economic structure improving and government debt under control, the economy will continue to expand at a medium-to-fast pace, helping prevent debt risks, the finance ministry said in its statement Wednesday.

Moody's Investors Service downgraded China's credit ratings by one notch earlier on Wednesday, saying it expects the financial strength of the world's second-biggest economy will erode in coming years as growth slows and debt continues to rise.

It's "absolutely groundless" for Moody's to argue that local government financing vehicles and state-owned enterprise debt will swell the government's contingent liabilities, according to a statement released by the Ministry of Finance.

The ratings agency also changed its outlook for China to stable from negative.

The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fueled stimulus.

The Australian dollar, sometimes used as a proxy of China-related trades, eased slightly but reaction to the downgrade was also relatively subdued. Rival ratings agency Standard & Poor's downgraded its outlook to negative in the same month. It changed its outlook to stable from negative.

"However, we do not think that the reform effort will have sufficient impact, sufficiently quickly, to contain the erosion of credit strength associated with the combination of rising economy-wide leverage and slower growth".

Moody's has Japan at the same A1 rating China is now on. Chinese stocks sank Wednesday after Moody's cut the country's debt rating and other Asian market. First, capital stock formation will slow as investment accounts for a diminishing share of total expenditure. That said, "it doesn't matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are worldwide investors".

When Moody's cut its outlook on China in March 2016, former Finance Minister Lou Jiwei said at that time the government didn't "care much" about it.

The slowing economy has become an increasingly sensitive topic in China, with authorities directing mainland Chinese economists and journalists toward more positive messaging.

That means that higher offshore funding costs could see debt issuers return to domestic funding markets, potentially increasing concentration risk within China's financial system making it harder for the People's Bank of China to tighten monetary policy in the future.

But while capital outflows have been contained during the first quarter this year, there has been a pick-up in April and ANZ expects to see onshore dollar demand rise.

GDP growth in China peaked at 10.6 percent in 2010, before falling to 6.7 percent previous year. China's massive debt been at the center of concerns among economists and Beijing in recent months, and has roiled global financial markets since late a year ago.

Other reports by TheDigitalNewspaper

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