Published: Tue, May 30, 2017
Finance | By Laverne Griffith

Hong Kong stocks hit 22-month high despite Moody's China downgrade

Hong Kong stocks hit 22-month high despite Moody's China downgrade

Moody's Investors Service on Wednesday downgraded China's sovereign debt one notch to A1, the agency's fifth-highest rating.

Meanwhile, China's Ministry of Finance claims the methodology used in the downgrade does not accurately account for the country's capacity to expand demand, and said Moody's "overestimate the difficulties facing the Chinese economy".

Though progressing reforms are likely to change the economy and financial system over time, they might not stop rising debt or the consequent growth in contingent liabilities for the government, according the agency.

In a statement, the agency said: "The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows".

At least over the near term, with monetary policy limited by the risk of fuelling renewed capital outflows, the burden of supporting growth will fall largely on fiscal policy, with spending by government and government-related entities - including policy banks and state-owned enterprises (SOEs) - rising.

China's total non-government debt is estimated to have jumped to 260% of gross domestic product in 2016, from 170% in 2007.

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.

After the downgrade, Moody's said it doesn't plan to move China's rating lower than A1, which is still investment grade, anytime soon.

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Chinese leaders have identified the containment of financial risks as a top priority this year, but are moving cautiously to avoid choking economic growth. The government has trimmed its 2017 growth target to around 6.5 percent after it expanded 6.7 percent in 2016, the slowest growth rate since 1990.

Global banking and financial advisory provider Macquarie, "This news is a clear China negative in our view (even though the rationale for the downgrade contained nothing new)", and "The next question is whether S&P will follow Moody's".

The downgrade, which is the first for China since 1989, was quickly dismissed by the government's finance ministry.

The state planner, the National Development and Reform Commission, added in a statement that China's debt risks are generally controllable as measures to lower corporate leverage have achieved initial results, and systemic risks from debt are relatively low.

This indicates, Li said, that the global market acknowledges China's economic fundamentals are improving and the credit risks are reducing.

Moody's also cast doubt on the effectiveness of China's reform plans, although it said the government's commitment was "clear". Chinese stocks sank Wednesday after Moody's cut the country's debt rating and othe.

"The institutional features which grant Hong Kong, at present, a degree of political and economic independence together with the SAR's (Special Administrative Region) intrinsic credit strengths, allow Hong Kong's rating to exceed that of China".

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