Moody’s downgrades China’s Credit Rating

China’s credit rating got downgraded from A1 to Aa3 on May 31, 2017. This downgrade registered by Moody’s Corporation came as a huge surprise to most people, as such a massive downgrade was registered for the first time in the last 25 years. Moody’s cited concerns about the growing debts in the country as the reason for this monumental decrement.

China’s economic growth recorded a decrease of 0.2% during 2015-2016. The Chinese government budget deficit was found to be around 3% of the total GDP in 2016. However, Moody’s has estimated that it would grow up to 40% by the end of the next year and as high as 45% at the end of the decade. China’s financial troubles started after the global financial crisis in 2008, when the government decided not to stop spending on infrastructure to keep the economic engine of the country chugging. Instead, it accelerated its spending on highways, airports, and real estate development. The funding needed for such aggressive development was heavily borrowed by local officials and state-run companies. China did not stop at just this, as it continued amassing debts even after the crisis had passed.

Despite the recent revolutionary reforms made by the government, China still lacks the presence of a sizeable equity market. This debt left by the market in turn finances the economy wide debt of the country including those by households, private companies as well as the government. As a result, China still remains underdeveloped in the fields of its economy.

Moody’s expects a rise in China’s contingent and indirect liabilities. According to Moody’s, “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.” The report also specified a distinct rise in the economy wide debt along with the relaxation of the overall economic growth, prompting the reduction in rating.

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