Moody’s downgrades China’s credit rating for first time since 1989

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Moody's downgrades China's credit rating for first time since 1989

One of the world’s biggest credit rating agencies, Moody’s Investors Service, has downgraded China. It’s the first time in almost 30 years that Moody’s cut China’s credit rating. What does this mean, and how did the world economy react?

CGTN’s John Terrett reports.

Moody's downgrades China's rating for first time since 1989

One of the world's biggest credit rating agencies, Moody's Investors Service, has downgraded China. It's the first time in almost 30 years that Moody's cut China's credit rating. What does this mean, and how did the world economy react? CGTN's John Terrett reports.

On Wall Street, China is seldom far from investors’ minds. What happens in the world’s second largest economy has the potential to have a huge impact here in the biggest one.

By downgrading China’s credit rating, Moody’s said China’s debt is likely to grow substantially, while its economy slows down.

For some China watchers, the downgrade is no surprise.

“Talk of Chinese debt and the size of Chinese debt have been going on for years. They seem to be very reliant on these high levels of growth, which is slowing,” Craig Erlam, a Senior Market Analyst at OANDA said.

Not surprisingly, all this hasn’t gone down too well in China. Beijing rejects Moody’s opinion that financial growth may fade with the finance ministry accusing Moody’s of exaggerating economic difficulties and underestimating reforms.

And credit rating agencies have been discredited in the past – most notably when all of them failed to anticipate the 2008 global financial collapse.

China’s debt is mostly internal, government and state-owned – little of it extends outside China. That’s maybe why Wall Street and global markets hardly seemed rattled even though some worry China will reign in imports from key world markets.

Global stocks prices dipped a little after Moody’s announcement. The Yuan slipped against the U.S. and Australian dollars. Australia is China’s biggest trading partner, and the Aussie dollar is often seen an indicator for China risk. Heavy metal and mining stocks also declined.

Dan Alpert of Westwood Capital said the big difference between China and western economies is that China’s is managed for employment, not a balance sheet.

“None of the things that Moody’s is talking about, right, has any merit outside the strict interpretation of a pure capitalist economy and China is not a purely capitalist economy. It, as we all know, is capitalist with Chinese characteristics,” Alpert said.

In the meantime, China’s leaders have identified the containment of financial risks and asset bubbles as a top priority for the year, even at the expense of some reform programs.