Overnight, Moody’s highlighted the likelihood of a “ material rise” in economy-wide debt and expectations that China’ s financial strength could “ erode somewhat” as a result.<\/b>
\nO vernight, Moody’s highlighted the likelihood of a \u201cmaterial rise\u201d in economy-wide debt and expectations that China\u2019s financial strength could \u201cerode somewhat\u201d\u00a0as a result.
Jim Reid, of Deutshce Bank, points out that following the ratings downgrade China’s rating at Moody’s\u00a0is now level with that of Japan and below other Asia economies of Taiwan and Macau.
He added: «While there were no real revelations in the Moody\u2019s statement the timing appears to have caught markets by surprise a little.
«Equity markets in China initially fell sharply on the news and while having pared back some of the losses, are still underperforming this morning.»
C hina’s offshore yuan slipped in knee-jerk reaction to Moody’s downgrading China’s long-term local and foreign currency issuer ratings by one notch. However, the overall response was limited.
The yuan fell to 6.8901 per dollar, down by 0.1pc, before pulling back to 6.8841 for a loss of about 0.05pc.
E uropean shares are mixed in early trade, stuck just below 21-month highs, after Moody’s downgraded China’s rating as the country’s debt mountain continues to climb.
Shares in the region were hurt by weakness in mining, while oil produces edged up on the back of strength in Brent crude prices.
Here’s a snapshot of the current state of play:
M ike van Dulken, of Accendo Markets, said: «A mildly positive opening call\u00a0comes as investors weigh up Moody\u2019s credit downgrade for\u00a0China\u00a0on debt sustainability concerns, a lukewarm reception for Trump\u2019s first budget (does it all add up?) as well as rising optimism ahead of tomorrow\u2019s OPEC meeting (especially after more favourable US inventory data) and news of potential M&A in the soft commodity sector.»
W eighing in on the move by Moody’s to downgrade China’s credit rating, Paul Donovan, economist at UBS, said:
«Asian equities sort of noticed, which is unusual, normally no one pays any attention to the actions of the credit ratings agency. Because if you give a credit rating agency attention every time it changes a rating, it will just encourage the credit rating agency to change ratings again.\u00a0
«However, the reaction has been very modest and there is no real economic insight in the move.»
C hina’s massive debt has been at the centre of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.
Moody’s has no specific timetable for re-visiting China’s rating but will monitor conditions on a regular basis.
Speaking to Reuters, Marie Diron, associate managing director of Moody’s Sovereign Risk Group, said the risks to China’s financial system were «broadly balanced.»
Q uotes from Reuters
C hina’s Finance Ministry said the downgrade, Moody’s first for the country since 1989, overestimated the risks to the economy and was based on «inappropriate methodology».
In a statement, the ministry said:
\u201cMoody\u2019s views that China\u2019s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government\u2019s ability to deepen supply-side structural reform and appropriately expand aggregate demand.»
R euters\u00a0 \u00a0highlights that more than two hours after Moody’s downgraded China’s rating, no Chinese state media had published the news:
More than two hours after the announcement from Moody’s, no Chinese state media had published news about the downgrade.
The slowing economy has become an increasingly sensitive topic in China, with authorities directing mainland Chinese economists and journalists towards more positive messaging.
M oody’s downgraded China’s credit ratings for the first time since 1989 as it warned the economy’s financial strength will erode in the coming years as debt continues to rise.
The credit ratings agency downgraded its long-term local and foreign currency issuer ratings from Aa3 to A1. It also changed its outlook for the Asian powerhouse to stable from negative.
In a statement, Moody’s said:
«»The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.»
T he ratings agency said China’s\u00a0need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus.
It added: «While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.»
In March 2016, , Moody’s cut its outlook on China’s ratings to negative from stable, citing rising debt and uncertainty about authorities’ ability to carry out reforms. Rival ratings agency Standard & Poor’s downgraded its outlook to negative in the same month.
G ood morning and welcome to our live markets coverage.
Overnight in Asian trading, investors were shaken after Moody’s downgraded China’s sovereign credit rating for the first time since 1989.
The credit rating agency said the downgrade was prompted by worries about rising debt in Asia’s economic powerhouse.
D espite initial falls, China’s main indices recouped earlier losses following the downgrade. The blue-chip CSI300 index was unchanged at 3,424.17 points, while the Shanghai Composite Index \u00a0added 0.1pc to 3,064.08 points.
A way from China, European Central Bank president Mario Draghi will give a speech on financial stability in Madrid this afternoon.
While the economic calendar is relatively sparse today, there is a raft of corporate releases. Also on the agenda:
Full-year results: Lombard Risk Management, Marks & Spencer Group, Nature Group, Pennon Group, Mediclinic International, Hogg Robinson Group, Babcock International, Vedanta Resources, Great Portland Estates
Interim results: Britvic
Trading update: Kingfisher, Tungsten Corporation, Dixons Carphone, HSS Hire Group
AGM: Sportech, Crossrider, Glencore, Ibstock
Economics: Existing home sales (US) , FOMC meeting minutes (US) , HPI m\/m (US) , GfK consumer climate (GER)<\/p>\n