Moody's downgrades Hong Kong credit rating after China cut

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Moody's Investors Service on Wednesday downgraded China's sovereign debt one notch to A1, the agency's fifth-highest rating.

At the same time, Beijing's need to deliver on official growth targets is likely to make the economy increasingly reliant on stimulus, Moody's said.

Moody's expects economic growth to decline to close to 5 percent over the next five years.

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 above assertion, however, failed to recognize China's 36.7-percent increase in government debt in 2016, which is moderate compared to the previous year.

The city's involvement in China's Belt and Road initiative also brings its economy and financial systems closer to the mainland, Moody's said.

But the rating is just another confirmation of what foreign investors have slowly been realizing: China's debt-fueled growth model is unsustainable in the long run, and Beijing is seeing diminishing returns from its credit binge. China's total outstanding credit was worth an alarming 260% of its GDP past year, up from 160% in 2008, according to Bloomberg.

ANZ: China's downgrade by Moody's risks creating 'a negative feedback loop'

Moody's changed its outlook for Hong Kong to stable from negative, citing the government's vast cash pile it can use to ward off financial and economic shocks.

China's leaders have identified the containment of financial risks and asset bubbles as a top priority this year. Moody's now rates China's credit alongside that of countries such as Japan, Saudi Arabia and Israel. Growth hit 10.6 percent in 2010 before sliding to a near-three decade low of 6.7 percent a year ago.

China's debt has been increasing lately by an amount equal to about 15% of the country's output each year, to keep the economy growing from 6.5% to 7%.

The state planner, the National Development and Reform Commission, added in a statement that China's debt risks are generally controllable as measures to lower corporate leverage have achieved initial results, and systemic risks from debt are relatively low.

"Moody's has overlooked the sound economic fundamentals, robust financial regulatory regime, resilient banking sector and strong fiscal position that Hong Kong has", Financial Secretary Paul Chan said in a statement.

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. Worries are that China, now the second largest economy behind the U.S, can not thrive without the ability to continue export growth.

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