Moody’s downgrades China, first time since 1989

Moody's Investors Service on Wednesday downgraded China's credit rating to A1 from Aa3, changing its outlook to stable from negative, citing expectations that China's financial strength will erode somewhat over the coming years. It was Moody's first downgrade for the country since 1989, according to Reuters.

"Moody's expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage," it said in a statement. "The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole."

The Chinese economy expanded by 6.7% in 2016 compared with 6.9% the previous year, the slowest growth since 1990.
Moody's estimated that while the government budget deficit in 2016 was "moderate" at around 3 percent of gross domestic product (GDP), it expected the government's debt burden would rise toward 40 percent of GDP by 2018 and 45 percent by the end of the decade.

But it is worth noting that most of this debt is held by Chinese state-owned enterprises or "quasi-state" like entities – not international investors – so it is less likely to have a spillover effect into other economies.

Unsurprisingly, China's finance ministry didn't agree with the move.

In a statement on its website, the ministry said the downgrade was based on an "inappropriate method" and that Moody's was overestimating the difficulties China's economy faced, while underestimating the government's efforts to tackle structural reforms and overcapacity.