Hong Kong stocks hit 22-month high despite Moody's China downgrade

Hong Kong stocks hit 22-month high despite Moody's China downgrade

"It overestimates the difficulties facing the Chinese economy and underestimates the government's ability to deepen supply side structural reform and appropriately expand overall demand", the ministry said. Whilst acknowledging that reforms on the financial system are being implemented, the agency said it is unlikely to prevent a further material rise in economic debt and government liabilities.

Moody's has cut its credit rating for Hong Kong hours after downgrading China for rising debt levels, which it said would have "significant impact" on the Asian financial hub due to their close links.

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

While the downgrade is likely to modestly increase the cost of borrowing for the Chinese government and its state-owned enterprises (SOEs), it remains comfortably within the investment grade rating range.

The Chinese finance ministry said Moody's had exaggerated the economic situation in China, and was based on "inappropriate methodology".

Moody's joined other observers in highlighting the risks of an overall debt pile that hit 256% of GDP at the end of a year ago, which it said signalled "an erosion" in China's credit profile. China's total outstanding credit was worth an alarming 260% of its GDP a year ago, up from 160% in 2008, according to Bloomberg. In addition, Moody's expressed that despite the decline, at an A1 rating level the risks can still be balanced.

The move brings Moody's in line with rival Fitch, which has had an equivalent A+ rating on China since November 2007.


China's economic growth may face more headwinds in the second half, sparking risk aversion at some point late this year.

Also, as per the report, India's revenues at 21 per cent of GDP are considerably lower than the median income of countries with the BAA ratings: 27.1 per cent.

Hong Kong's Finance Secretary Paul Chan said the credit agency "mechanically" downgraded the city's credit without taking into account fundamentals. Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

The cut to China's long-term local currency rating to A1 from Aa3 puts the country on a par with the Czech Republic, Estonia, Israel, Japan and Saudi Arabia.

China's 13th five-year plan released last year announced an average annual growth rate of more than 6.5 percent for last year to 2020.

The Chinese economy expanded by 6.7 per cent in 2016 compared with a peak of 10.6 per cent in 2010.

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