Guang Niu/ Getty Images
After placing China’s sovereign credit rating on watch negative 15 months ago — laying the potential trigger for a ratings downgrade — ratings agency Moody’s followed through today, downgrading the nation’s credit rating one notch from Aa3 to A1 with a steady outlook.
A1 is the fifth-highest rating assigned by Moody’s, and is deemed to be investment grade.
According to Khoon Goh, David Qu and Raymond Yeung, researchers at ANZ, Moody’s decision to downgrade stems from “their expectation that China’s debt will continue to rise while potential growth slows, eroding the country’s credit metrics”.
“Moody’s does not see the government’s reforms as fully offsetting the rise in economic and financial risk,” the trio wrote in a note released following the decision.
This, they say, has the potential to create a negative feedback loop within the Chinese economy.
They explain:
From a macro perspective, downgrade by rating agencies could potentially erode the financial soundness of China, creating the risk of a negative feedback loop. The downgrade will likely lift the cost of financing of Chinese issuers, especially in the offshore market. They will likely turn on onshore financing platforms, including banks, shadow banks and onshore bond markets as these channels do pay less attention to rating actions of international agencies. As the loan exposure of the domestic monetary system to local borrowers heightens, the central bank will be cautious in policy tightening in the future, extending the lingering debt concerns further.
Goh, Qu and Yeung say that bonds issued outside China, especially those issued in foreign currencies, will see a negative impact from the downgrade, making it harder to attract capital inflows.
NOW WATCH: Yale history professor: Trump’s path to tyranny is unfolding
