How’s China doing in tackling its growing debt problem? Not great, according to one of the world’s top credit rating agencies.
Moody’s Investors Service on Wednesday downgraded China’s debt one notch to A1, its fifth-highest rating.
China’s financial health will “erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows”, the agency said in a statement.
The Chinese government is facing the difficult balancing act of trying to rein in the country’s high levels of corporate debt while keeping the world’s second largest economy growing at a steady clip.
Beijing’s reform efforts are “likely to transform the economy and financial system over time,” but they’re unlikely to prevent a “material rise” in debt,” Moody’s said.
China’s economy grew 6.9% in the first quarter of this year, picking up the pace from the end of 2016. But economists say they expect it to slow down later this year as government stimulus measures fade.
Efforts by regulators in recent weeks to clamp down on risky debt in the country’s financial system has unsettled investors. The benchmark Shanghai Composite is down more than 7% from the high it reached in April.
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.
“The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen,” Moody’s said.
Beijing should be able to weather any negative shocks, helped by the country’s relatively strong economic growth, it added.
