"There's nothing so surprising about Moody's decision to downgrade China's sovereign debt one notch to A1," says Andy Mukherjee on Bloomberg Gadfly. Since March 2016, when Moody's and its rival Standard & Poor's (S&P) cut their outlook for China, "an eventual demotion has been the most likely outcome". (S&P continues to rate China one notch higher, while Fitch, the third main ratings agency, already ranks it at its equivalent of A1.) "Still, it mustn't have been an easy decision, considering the tongue-lashing they got from the Chinese finance minister at last year's Group of 20 meeting over the bias' in their assessment."
The downgrade reflects Moody's view that recent reforms will not be enough to slow the pace at which debt is rising in the Chinese economy, the agency's Marie Diron tells Reuters. China's non-financial debt-to-GDP including corporate, government and household debt now stands close to 300% of GDP, with corporate debt accounting for more than half of this. The key force behind this runaway credit growth has been government-led stimulus to boost growth in recent years. Since policymakers remain keen to achieve economic growth targets, any efforts to cut debt levels have been relatively cautious, ahead of a political leadership shuffle set for later this year.
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