BOFIT Viikkokatsaus / BOFIT Weekly 2017/22

The American Moody's, one of the big international credit ratings agencies, lowered its rating of Chinese sovereign credit by one notch from Aa3 to A1. The new rating puts China's sovereign rating on par with Japan and Estonia. Moody's noted that China's high economic growth targets can only be met by continued debt-fuelled stimulus. Moreover, China faces added pressure to rely on stimulus as structural factors will slow potential economic growth further in coming years. The central government's debt burden will increase, and it faces increased contingent liabilities risks from state-owned enterprises, policy banks and off-budget financial vehicles created by local governments. Moody's highlighted the fact that current reforms to put economic growth on a sustainable basis and slow the credit growth are insufficient and proceeding too slowly. Moody's last downgraded China's sovereign credit rating in 1989. Fitch, another big ratings agency, downgraded China in 2013

The change in credit rating produced little immediate market reaction as the change was largely seen as a reminder of China's financial issues. However, China's ministry of finance responded immediately to Moody's announcement, saying it saw no basis for the downgrade

On the heels of its China decision, Moody's also lowered the sovereign rating of the Hong Kong special administrative region – a reflection of how intertwined the Hong Kong economy is with China's. Observers believe there is pressure to downgrade the ratings of some of China's neighbours. While the sovereign downgrade could also ding corporate credit ratings of Chinese firms, the immediate impact should be minor as Chinese firms hold relatively little foreign debt.