China says Moody’s downgrade overestimates difficulties

China’s Ministry of Finance (MOF) on Wednesday said that a credit downgrade by Moody’s was based on “inappropriate methodology”, and has somewhat exaggerated the difficulties the Chinese economy is facing.

The credit rating agency announced earlier today that it was cutting China’s long-term local currency and foreign currency issuer ratings by one notch from Aa3 to A1, citing the expectation that China’s financial strength would erode due to rising economy-wide debt.

China's sovereign credit rating downgraded by Moody's. /Screenshot from Moody's website

Moody’s credit rating goes with the “pro-cyclical” rating approach and it’s inappropriate, said the MOF.

“The agency claimed that China’s real economy debt will rise rapidly, reform measures would prove ineffective and the government would continue to maintain growth via stimulus measures,” the MOF also explained that, “this is exaggerating risks the Chinese economy is facing and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand.”

In its response to Moody’s estimation that the Chinese government’s debt burden would increase toward 40 percent of GDP by 2018 and 45 percent by the end of the decade, the ministry said that the debt risk index for 2018 to 2020 is expected to have no big difference from that of 2016.

File photo of a textile factory in Jiangsu Province/ VCG Photo‍

According to the National Statistics Bureau, as of 2016, China had a total of 27.33 trillion yuan (4 trillion US dollars) of government debt with the GDP totaling 74.41 trillion yuan (10.82 trillion dollars). This means the country has a debt ratio of 36.7 percent, which is much lower than the European Union’s 60 percent warning level, as well as the debt ratio of other major and emerging economies.

As supply-side structural reform continues, government debt will be under stricter control. On the other hand, China’s GDP growth is expected to increase at a high pace, which will serve as a fundamental support for local government debt risk control.

The MOF pointed out another error in Moody’s credit rating criteria as it mingled government debt with local government financing platforms and debt of state-owned enterprises.

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