Moody’s downgrades China’s rating to A1 from Aa3 and changes outlook to stable from negative

Moody’s Investors Service has today downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

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.

China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China’s local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China’s short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).

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