But analysts say Beijing has been taking measures to defuse its debt bomb
Fresh doubts were cast on Beijing’s ability to maintain economic and financial stability at any cost on Wednesday after Moody’s Investors Service downgraded China’s credit rating for the first time since 1989. The international ratings agency changed China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3, saying the country’s financial strength will be eroded in coming years and debt will continue to rise as economic growth slows. Hong Kong’s stock market retreated from a 22-month high following the downgrade, while the mainland A-shares market dropped to a seven-month low, closer to the psychological barrier of 3,000 points. Iron ore futures in Shanghai dropped 6 per cent in the morning session. China’s Ministry of Finance responded to the move with a statement on its website saying Moody’s used “inappropriate” methods to overestimate the country’s economic difficulties and to underestimate Beijing’s ability to handle such challenges. “The Moody’s downgrade is based on an inappropriate method… It overestimated the difficulties faced by China and underestimated its ability to deepen structural reform and moderately expand overall demand, ” the Ministry of Finance said. China’s rapid accumulation of debt has become something of an elephant in the room for the world’s second biggest economy. The country’s overall debt to gross domestic product, an indicator of financial leverage, rose to about 261 per cent by the end of last year – from about 150 per cent in 2008. The ratio for the corporate sector, estimated at 164 per cent, is especially high compared with developed countries, although the direct government debt is only about 40 per cent of GDP. “The ongoing reforms are not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government, ” Moody’s said.
