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World
25 May 2017

Moody's downgrades China's rating, Beijing cries foul play

The Great Wall of China is finally cracking up or at least rating agency Moody's thinks it is, as for the first time in 28 years it has scaled down China's rating from Aa3 to A1.

This rating may not affect China now but it is a premonition of what may transpire in the future for Asia's largest economy.

Here's all about it.

In context

Moody's rating will spook but not tumble China
The reason for such a drastic measure

Step

The reason for such a drastic measure

This current rating is due to the belief of Moody's that in the near future, China's financial prowess will start to erode and "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."

Thus, from a stable outlook, the rating has been changed to negative.

Reaction

Beijing rubbishes rating

China's Finance ministry dismissed the rating saying, it was based on inappropriate methodology.

The official statement read, "Moody's views that China's non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures, are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government's ability to deepen supply-side structural reform and appropriately expand aggregate demand."

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Bad loans are a problem everywhere

NPA

Bad loans are a problem everywhere

China is also harrowed by a bad loan problem, as state-run Xinhua news agency in February reported, that the China Banking Association had said that China's bad loans have reached a massive $220 billion.

However, the Chinese market seemed unfazed by this change of rating, as the Shanghai stock market slumped by 0.45%, while the Shenzhen market rose by 0.12%, which is pretty average.

Slowdown

China's fall was not a sudden one

Moody's said that the A1 rating best reflects the fact that China's direct government, indirect and economy-wide debt will continue to rise.

David Cheetham, chief market analyst at brokerage XTB remarked, "After being very much at the front and center of global risk sentiment…, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the US taking the limelight."

India needs to step up

Growth

India needs to step up

According to the rating agency, China's potential for growth in the next five years will plummet to about 5%, owing to a smaller working age population and a marked slowdown in productivity.

This could be a good indication for India to buckle up; as according to projections, it will have 64% of its population within the working age group in the next four years.

Conclusion

Ratings are not etched in stone

However, an economy is not solely based on ratings; India also doesn't enjoy high ratings from Fitch, Moody's and Standard & Poor's (S&P).

This has caused Arvind Subramanian, India's chief economic adviser to lash out saying, "In recent years, rating agencies have maintained India's BBB-rating, notwithstanding clear improvements in our economic fundamentals," and "why do we take these rating analysts seriously at all?"

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