The ratings agency is likely to attract further criticism from Beijing after doubling down on its view that the economy is headed for trouble

This article is more than 3 years old

This article is more than 3 years old

China’s structural reforms will not be enough to arrest its rising debt and another credit rating downgrade for the country is possible unless it gets its ballooning borrowing in check, two officials at Moody’s ratings agency have said.



Doubling down on comments earlier this week that China’s financial strength will be eroded because of huge corporate and household debt, Moody’s said the country’s “vast reform agenda” would not be enough to prevent borrowing from weighing on economic growth.

China may no longer get an A1 rating if there were signs that debt was growing at a pace that exceeded Moody’s expectations, Li Xiujun, vice president of credit strategy and standards at the ratings agency, said in a webcast with his colleague Marie Diron.

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“If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating,” Li said.

But Li added: “If there are signs that China’s debt will keep rising and the rate of growth is beyond our expectations, leading to serious capital misallocation, then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively.

“China may no longer suit the requirement of A1 rating.”

The authorities were furious with the agency’s decision to downgrade its sovereign rating one notch to A1 from Aa3 and the latest comments are likely to cause continued irritation in Beijing.

Although any impact on sovereign borrowing costs will be slight, China dislikes criticism of its economic policy.

The finance ministry denied that growth would suffer while a front-pade editorial in the People’s Daily called Moody’s “sloppy” and said the agency decision was based on inappropriate methodology, exaggerating difficulties facing the economy and underestimating the government’s reform efforts.



Government-led stimulus has been a major driver of China’s economic growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt – now standing at nearly 300% of gross domestic product (GDP).

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“The financial and policy capacity that the Chinese government has to implement such measures and to mitigate some of the default risks is a very important element in supporting the rating at A1, which is the fifth highest rating in our tier, and our view that the outlook of that rating level is stable,” said Diron, who is associate managing director of Moody’s sovereign risk group.

China has vowed to lower its debt level by rolling out measures such as debt-to-equity swaps, state-owned enterprises (SOEs) mixed-ownership reforms, reduction of excess capacity, and more recently regulatory tightening in the shadow banking sector.

But authorities are also keen to meet official economic growth targets, and moves so far have been cautious, especially heading into a political leadership reshuffle later this year.

While Moody’s expects China’s growth to slow to around 5% in coming years, from 6.7% last year, the economy would remain robust, and the likelihood of a hard landing was slim, Diron said.