China has received a downgrade on its credit score on worries about the future state of the economy.
Moody’s Investors Services brought down China’s long-term local currency and foreign currency issuer ratings. They were reduced by one notch to A1 from Aa3.
However, China’s finance ministry said Moody’s was exaggerating the mainland’s economic difficulties. Further, Beijing believes that Mood’s is underestimating reform efforts.
Moody’s said in a statement that the downgrade reflected expectations that China’s financial strength would “erode somewhat over the coming years.” They expect the economy-wide debt continuing to rise as potential growth slows”.
What this downgrade boils down to is whether you fundamentally believe the Chinese government has the ability to write its debt off. Or does it somehow have an ability to reduce debt levels? Furthermore, can it do that whilst trying to maintain strong economic growth figures?
Beijing’s is attempting to rebalance its economy towards domestic consumption. This has led to major challenges for large manufacturing sectors. In addition, there have been layoffs. This has been especially hard in heavily staffed state-run sectors such as the steel industry.
The downgrade comes as Beijing has been making efforts to clean up its lending practices, which have been viewed as a threat to financial stability.