Moody's Downgrades China Rating To A1, Revises Outlook To Stable

Moody's on Wednesday downgraded China's long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3 and changed the outlook to stable from negative, due to concerns over the rising debt and slow growth and reforms as the government tries to implement a shift to economic expansion driven by domestic demand than exports.

The rating downgrade was the first from Moody's since 1989. The country's outlook was lowered in March 2016 to negative.

S&P rates China's at AA- with a negative outlook. Fitch has an A+ rating with a stable outlook.

With the latest downgrade, Moody's has placed China on par with Japan.

The downgrade reflects 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 agency 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", Moody's said.

The stable outlook reflects assessment that, at the A1 rating level, risks are balanced, the rating agency said.

The erosion in China's credit profile will be gradual and will be eventually contained as reforms deepen, Moody's added.

The agency also stressed that that the importance the Chinese authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole, it cautioned.

The state-run news agency Xinhua reported that the Chinese Finance Ministry has dismissed the rating downgrade from Moody's saying that the move was based on the "pro-cyclical" rating approach which is "not appropriate".

"These viewpoints overestimate the difficulties facing the Chinese economy and underestimate the capabilities of China to deepen supply-side structural reform and expand overall demand," Xinhua quoted the ministry as saying in a written statement.