Moody’s Investors Service has downgraded China’s long-term local currency and foreign currency issuer ratings from Aa3 to A1 and changed the outlook from negative to stable, citing rising debt, slowing growth, and weakening financial strength.
The credit rating A1 is still considered investment grade with low credit risk, but is classed as upper medium grade rather than high grade. In a statement made on Wednesday Moody’s say:
“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. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.
“The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.”
Moody’s also expects China’s growth to slow to 5% over the next five years, predicting a slowdown in capital stock formation and productivity, and a fall in working age population.