Photo: Reuters
Photo: Reuters

China on Wednesday rejected Moody’s decision to downgrade its credit rating, saying the agency had used an “inappropriate” method to assess the risks facing the world’s number-two economy.

“It over-estimated the difficulties that the Chinese economy is facing,” the Ministry of Finance said in a statement.

Moody’s Investors Services downgraded China’s long-term local and foreign currency issuer ratings on Wednesday, citing expectations that the financial strength of the world’s second-biggest economy would erode in the coming years.

The downgrade by one notch to an A1 rating from Aa3 – the first since 1989 – comes as the Chinese government grapples with the challenges of slowing economic growth and rising financial risks stemming from soaring debt.

“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,” the company said in a statement.

“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,” it said.

The ratings agency also changed its outlook for China to stable from negative.

China’s top leadership has identified the containment of financial risks and asset bubbles as a top priority this year. All the same, authorities have moved cautiously to avoid knocking economic growth, gingerly raising short-term interest rates.

While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises, it remains comfortably within the investment grade rating range.

“The move by Moody’s to reduce the rating was not a shock given it had already downgraded its outlook from neutral to negative in March. The timing of the rating reduction has taken the market by surprise, however and we believe that S&P may follow suit,” said Arthur Lau, head of Asia fixed income at PineBridge Investments.

China’s Shanghai Composite Index fell more than 1% in early trade.

“It’s quite clear that it’s going to be quite negative in terms of sentiment, particularly at a time when China is looking to derisk the banking system, as well as at a time when there’s going to be some potential restructuring of SOEs,” said Vishnu Varathan, Asia head of economics and strategy at Mizuho Bank’s Treasury division.

In March 2016, Moody’s cut its outlook on China’s government credit ratings to negative from stable, citing rising debt and uncertainty about the authorities’ ability to carry out reforms and address economic imbalances. Standard & Poor’s downgraded its outlook to negative in the same month. S&P’s AA- rating is one notch above both Moody’s and Fitch Ratings’ A+ rating.

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