Singapore (IANS) - Moody's Investors Services on May 24 downgraded China's credit rating to A1 from Aa3 citing concerns about the country's growing debt, for the first such rating downgrade by the agency in 25 years. "Moody's expects that economy-wide leverage will increase further over the coming years. The planned reform programme is likely to slow, but not prevent, the rise in leverage," Moody's said.
"The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole," it said.
The US ratings agency also changed its outlook for China to stable from negative on the basis of balanced risks.
The statement said the downgrade reflected expectations that China's financial strength would "erode somewhat over the coming years, with the economy-wide debt continuing to rise as potential growth slows".
China's economy grew at the rate of 6.7% in 2016, as compared with 6.9% in the previous year. While the Chinese government budget deficit in 2016 was at around three% of gross domestic product (GDP), Moody's expected the government's debt would rise toward 40% of GDP by 2018 and 45% by the end of the decade.
It also expected contingent and indirect liabilities to rise due to the policy bank loans, bonds issued by Local Government Financing Vehicles and other state-owned enterprises' investments.
Moody's also said the economy-wide debt of the government, households and non-financial companies would rise, as economic activity tends to be financed with debt in the absence of a sizeable equity market.
In this regard, the report noted that the financial sector in China remained underdeveloped despite recent reforms.
"Pricing of risk remains incomplete, with the cost of debt still partly determined by assumptions of government support to public sector or other entities perceived to be strategic," it said.