Government strongly criticised the downgrade, saying it was based on “inappropriate methodology”
China’s structural reforms will slow the pace of its debt build-up, but will not be enough to arrest it and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at the ratings agency Moody’s said. The comments came two days after Moody’s downgraded China’s sovereign ratings by one notch to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount. Moody’s Investors Service also changed its outlook on China from “negative” to “stable”, suggesting no further ratings changes for some time. China has strongly criticised the downgrade, asserting it was based on “inappropriate methodology”, exaggerating difficulties facing the economy and underestimating the government’s reform efforts. Moody’s official Marie Diron on Friday by saying that the ratings agency has been encouraged by the “vast reform agenda” undertaken by the Chinese authorities to contain risks from the rapid rise in debt. However, while Moody’s believes the reforms may slow the pace at which debt is rising, they will not be enough to arrest the trend and levels will not drop dramatically, Diron said. Diron said China’s economic recovery since late last year was mainly thanks to policy stimulus and expects Beijing will continue to rely on pump-priming to meet its official economic growth targets, adding to the debt overhang. Moody’s also is waiting to see how some of the announced measures, such as reining in local government finances, are actually implemented, Diron, associate managing director of Moody’s Sovereign Risk Group, told reporters in a webcast. China may no longer get an A1 rating if there are signs that debt is growing at a pace that exceeds Moody’s expectations, Li Xiujun, vice-president of credit strategy and standards at the ratings agency, said in the same briefing. “If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating, ” Li said.
