China Disputes Moody’s Downgrading of Sovereign Credit Rating


China’s Ministry of Finance has has disputed the recent downgrade of its sovereign credit rating by Moody’s, claiming that the agency made its decision based on “inappropriate methods.”

For the first time in almost three decades Moody’s Investors Service has downgraded China’s sovereign credit rating to A1 from Aa3, and its outlook for the country to negative from stable, due to concerns about mounting debt and the health of the financial sector following almost a decade of credit-fueled stimulus.

“The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over coming years, with economy-wide debt continuing to rise as potential growth slows,” said the ratings agency in an official statement.

A spokesperson from China’s Ministry of Finance said at a press conference held on 24 May that Moody’s downgrading of the country’s sovereign credit rating was based on the “inappropriate method of pro-cyclical rating.”

“It significantly overestimates the difficulties faced by the Chinese economy from the perspective of the future rapid growth in the real economy’s debt , the likelihood of reform measures succeeding, and the government continuing to maintain economic growth by means of stimulus measures,” said the spokesperson.

“[It] underestimates the Chinese government’s deepening of supply-side structural reforms and ability to appropriately expand aggregate demand.”

MOF notes that the Chinese economy has maintained a positive development trend amidst overall stability since the second half of 2017, with Q1 GDP growth rising 0.2 percentage points year on year to 6.9%, and key economy indices all out performing expectations.

The ministry spokesperson also pointed to improvements government revenues as indicative of China’s robust economic health, as well as the future salutary impacts of supply side reforms.

“Consists with the performance of the economy, fiscal revenue growth has remained high, with national fiscal revenue rising 11.8% during the first four months of the year for a acceleration of 3.2 basis points compared to the preceding period.

“This is the highest level of acceleration since 2013

“The strong opening performance of the Chinese economy fully attests to the continual success of supply-side structural reforms.

“A series of major government measures have been implemented and are seeing results, with reform continually deepening in key areas and linkages, including state-owned enterprises, taxation, finance and pricing.”

With respect to the report’s forecast that China’s government debt could reach 40% by 2018 and 2020 by 45%, MOF said that the country’s budget law noted that local governments can only lawfully access credit via bond issuance, and that this would act as an effect cap on any rise in debt levels. 

“In 2016, China’s government debt ratio did not not change significantly compared to the previous year…during the period from 2018 to 2020, China’s government debt risk index will not undergo major changes compared to 2016.

According to MOF Chinese government debt was 27.33 trillion yuan in 2016, while official data from the National Bureau of Statistics puts GDP at 74.41 trillion yuan, resulting in a government debt to GDP figure of 36.7%.

“This is lower than the warning threshold of 60% for the European Union, as well as lower than the level for major market economies and emerging market nations,” said the MOF spokesperson.

“Risk is controllable overall.”

MOF also pointed to measures that the China plans to adopt in the near-term to curb government borrowing, as well as the impact on debt of supply-side reforms.

“Following the implementation of the new budget law, China will gradually establish standardised debt raising and financing measures for local governments, and the pace of growth in government debt will be effectively controlled.

“Following the continual progress of China’s supply-side structural reforms, government debt raising will be subject to strict controls.

“The scale of government debt will maintain rational growth, and in addition China’s GDP is expected to maintain medium-to-high growth, swell as provide a fundamental support to risk control in relation to local government debt.”