Hong Kong, China. Moody’s Investors Services downgraded China’s long-term debt ratings late Tuesday from A1 to A3.The credit ratings, for local-currency and foreign-currency issuers, remains solidly in investment-grade territory. And Moody’s raised its outlook to stable from negative for China in the assesment.
Moody’s expects China’s financial strength will “erode somewhat over the coming years” as debt rises and growth slows. Here are excerpts of the explanation from Moody’s:
“… 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.
The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen.
The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.
Chinese GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016. This slowdown largely reflects a structural adjustment that we expect to continue. Looking ahead, we expect China’s growth potential to decline to close to 5% over the next five years, for three reasons.
First, capital stock formation will slow as investment accounts for a diminishing share of total expenditure. Second, the fall in the working age population that started in 2014 will accelerate. Third, we do not expect a reversal in the productivity slowdown that has taken place in the last few years, despite additional investment and higher skills.
Earlier, Moody’s said that this decision reflects the agency’s expectation that in the coming years, China’s financial opportunities will somewhat decrease, and the overall debt in the economy will continue to increase as the growth slows down.