Moody's cuts China's rating on debt fears

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The downgrade is a reflection of Moody's expectation that the country's financial strength will weaken in the next few years, following a continuously rising economy-wide debt and a slowing down of potential growth.

A spokesman for the Ministry of Finance said Moody's report "overestimated the difficulties faced by China's economy, and underestimated the Chinese government's capability to deepen the supply side structural reform and moderate expansion of gross demand".

"Beijing's reform efforts are "likely to transform the economy and financial system over time", but they're unlikely to prevent a "material rise" in debt", Moody's said.

Economy-wide debt in China is continuing to rise as "potential growth" slows, said the ratings agency.

But, since banks are mostly state owned, and it is assumed the government would intervene in a crisis, banks are often allowed to issue debt at a higher rating.

"We expect the government's direct debt burden to rise gradually toward 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade", it said.

Chinese officials have said that Moody's analysis is based on the use of an "inappropriate methodology".

Government stimulus has been a key driver of growth in recent years, but it has also led to a sharp rise in credit and debt levels.

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Western institutions and media reports have since past year repeatedly referred to China's credit risks.

However, the agency changed its outlook to stable from negative, saying risks are now balanced and growth will likely remain relatively strong.

Fears are mounting that China is flirting with a potential disaster worse than the US sub-prime collapse that sparked the global financial crisis, and Japan's 1990s asset-bubble meltdown and resulting "lost decade". Chinese stocks sank Wednesday after Moody's cut the country's debt rating and othe.

Mei added that the China downgrade amounted to a "double standard" compared with how countries in Europe and the United States were treated.

China's Finance Ministry Wednesday dismissed a decision by worldwide rating agency Moody's to downgrade China's credit ratings.

According to China's laws on guarantee and budget, local government contingent liabilities include no more than the guaranteed debt they issue using loans from foreign governments or global organizations.

That news, while not disastrous, is worrying for investors given China's importance to the macroeconomic picture globally, and as a result, sentiment has taken a hit.

Moody's lowered its sovereign rating for China from "Aa3" to "A1" and changed the outlook from negative to stable today. "But S&P now rates China one notch above Moody's and Fitch, so a cut would not break new ground".