But analysts say Beijing has been taking measures to defuse its debt bomb<\/b>
\nFresh doubts were cast on Beijing\u2019s ability to maintain economic and financial stability at any cost on Wednesday after Moody\u2019s Investors Service downgraded China\u2019s credit rating for the first time since 1989. The international ratings agency changed China\u2019s long-term local currency and foreign currency issuer ratings to A1 from Aa3, saying the country\u2019s financial strength will be eroded in coming years and debt will continue to rise as economic growth slows. Hong Kong\u2019s 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\u2019s Ministry of Finance responded to the move with a statement on its website saying Moody\u2019s used \u201cinappropriate\u201d methods to overestimate the country\u2019s economic difficulties and to underestimate Beijing\u2019s ability to handle such challenges. \u201cThe Moody\u2019s downgrade is based on an inappropriate method\u2026 It overestimated the difficulties faced by China and underestimated its ability to deepen structural reform and moderately expand overall demand, \u201d the Ministry of Finance said. China\u2019s rapid accumulation of debt has become something of an elephant in the room for the world\u2019s second biggest economy. The country\u2019s overall debt to gross domestic product, an indicator of financial leverage, rose to about 261 per cent by the end of last year \u2013 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. \u201cThe 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, \u201d Moody\u2019s said. \u201cIt\u2019s just confirmation of China\u2019s financial risks, \u201d said Zhang Ming, a senior research fellow with the Chinese Academy of Social Sciences. \u201cThe government has realised the seriousness of this problem and has already taken strong regulatory action in recent months.\u201d The Moody\u2019s downgrade is likely to increase the cost of China\u2019s future debt sales overseas, and it may deter some foreign investors from China\u2019s onshore bond market \u2013 despite Beijing\u2019s efforts to entice them. A lower credit rating may also cast a shadow over Beijing\u2019s ambition of making the yuan a global currency. Lu Zhengwei, chief economist of the Industrial Bank, said China had been taking measures to defuse its debt bomb. \u201cIt has defined a clear boundary for government debt, improved its transparency and enhanced discipline for local borrowing, \u201d he said. \u201cCorporate debt defaults did indeed increase moderately during the deleveraging process, but this sort of risk relief is a good thing.\u201d But Moody\u2019s downgrade could be a reality check for Beijing, which has long asserted that the economy is on track and it can overcome any economic challenges \u2013 from a property market bubble to a stock market rout. Premier Li Keqiang in March called for an end to talk of an economic hard landing, while Finance Minister Xiao Jie issued an assurance that the country\u2019s debt risk was controllable. When Moody\u2019s downgraded China\u2019s outlook to negative at the start of last year, then finance minister Lou Jiwei tried to dismiss it, saying the country \u201cdoesn\u2019 t care\u201d. This time it was different, and the downgrade drew an almost immediate response from the ministry indicating heightened sensitivity on the issue. The move has brought to the surface doubts over China\u2019s ongoing handling of financial risk and credit-driven growth. \u201cThe likelihood of a major financial risk outbreak is very low this year but we agree [with Moody\u2019s] that the financial risk continues to rise in the medium- and long-term, \u201d said Zhao Yang, chief China economist of Nomura International in Hong Kong. \u201cDebt risk has not yet been handled substantially and more could be exposed in the coming years.\u201d Henry Chan Hing Lee, an adjunct researcher with the National University of Singapore\u2019s East Asia Institute, believed the absence of a clear official road map to handle the deleveraging process had triggered the downgrade. It comes after China agreed to open the door to US rating agencies, allowing them to operate independently rather than as a joint venture, as part of early agreements between Beijing and the Trump administration.<\/p>\n