Moody's Investors Service downgraded China's long-term local currency and foreign currency issuer ratings one notch Wednesday to A1 from Aa3, citing expectations of a gradual erosion of the country's credit profile in coming years.
At the same time, Moody's changed the outlook for China's ratings to stable from negative, noting that the government retains “considerable scope” to provide policy support for the economy and cope with “negative shocks.”
A1 is the fifth-highest of 10 investment-grade designations on Moody's ratings scale.
In an announcement Wednesday, Moody's tied the downgrade to its “expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.”
Some money managers took Moody's decision in stride.
Despite mounting pressures, “we are confident that China's central bank and its regulators are firmly in control of the situation,” said Luc Froehlich, head of investment directing, Asian fixed income, with Fidelity International.
Moody's predicted a continued slowdown in China's GDP growth to close to 5% a year over the next five years from 6.7% in 2016, citing a slowdown in capital stock formation, an accelerating fall in the working age population and a continued slowdown in productivity.
Moody's said with China's government prioritizing continued strong growth, the economy will likely become more reliant on policy stimulus. “Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signaling an erosion of China's credit profile, which is best reflected now in an A1 rating,” the company's statement said.
The government's reform efforts will continue but is unlikely to “contain the erosion in credit strength” likely to result from rising leverage and slowing growth, Moody's said.