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Moody's Downgrades China's Credit Rating

Credit Rating agency Moody's has is downgrading China's rating to A1 from Aa3. But it has also changed outlook on debt from negative to stable. This is Mood'y s first downgrade on China since 1989. 

Here a summary of the report from Moody's:

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. 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.

Moody's believe that China will continue to leverage, which is most likely the case. It believes that "rising debt will erode China's credit metrics." Basically, Moody's sees that growth is becoming more reliant of policy stimulus, which heightens credit risk (in an economic downturn for example). 

Moody's also does not believe reforms can offset these credit risks, a point that China's Finance Ministry disagrees with. According to

"Moody’s views that China’s 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’s ability to deepen supply-side structural reform and appropriately expand aggregate demand," the ministry said in a statement.

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