Moody’s Investors Service downgraded China’s sovereign credit rating for the first time in nearly 30 years, for fear that Beijing will prove unable to tame the nation’s mounting debt while also keeping the economy on a steady growth trajectory.
On Wednesday (May 24) Moody’s reduced China’s rating one notch to A1 from Aa3, while changing its outlook to stable from negative. The downgrade reflects the rating agency’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,” it said in a statement.
China’s economic growth, among the world’s fastest in recent decades, is largely fueled by its surging debts. China’s total outstanding credit was worth an alarming 260% of its GDP last year, up from 160% in 2008, according to Bloomberg. China’s GDP is roughly 11 trillion US dollars. The country’s ratio of non-financial debt to GDP now roughly matches that of the US, the world’s biggest debtor.
China’s GDP rose 6.9% in the first quarter, slightly beating market expectations. Beijing is aiming for growth of around 6.5% for the year, the lowest target in over two decades.
Moody’s said that China’s growth rate will slow to 5% in the coming years, although at a gradual pace thanks to the expected government fiscal stimulus.
China’s finance ministry responded that Moody’s downgrade is “inappropriate” because it’s based solely on economic fluctuations. “To a certain extent, [Moody’s] overestimated the difficulties faced by China’s economy, and underestimated the Chinese government’s ability to deepen the supply-side structural reform and to moderately increase aggregate demand,” it said in a statement (link in Chinese).