BEIJING -- The Moody's ratings agency on Wednesday cut China's credit rating, prompting protest from Chinese leadership and highlighting challenges faced by the Communist government as it attempts to overhaul a slowing economy.
The downgrade adds to warnings about China's reliance on credit to propel growth after the 2008 global financial crisis. Private-sector analysts say that reliance could drag on the economy or threaten the health of the state-owned banking industry.
Moody's Investors Service cut Beijing's long-term local currency and foreign currency issuer ratings by one notch to A1 from Aa3. It said China's financial strength is likely to erode as growth slows and that debt will rise further.
"We expect direct government, indirect and economy-wide debt to continue to rise, signaling an erosion of China's credit profile," Moody's said in a statement.
The Chinese Finance Ministry criticized the decision. It said Moody's overestimated difficulties facing the world's second-largest economy and underestimated China's industrial overhauls and financial strength.
Estimates of China's total nongovernment debt have risen from the equivalent of 170 percent of annual economic output in 2007 to 260 percent last year.
Communist leaders have cited reducing financial risk as a priority this year. They have introduced programs to reduce debts owed by state companies, including by allowing banks to accept stock to repay loans. But private-sector analysts say Chinese leaders are moving too slowly.
The Moody's announcement triggered a sell-off in Chinese stocks. The country's market benchmark, the Shanghai Composite Index, declined 0.6 percent by midday but recovered to end the day unchanged.
A Finance Ministry statement accused Moody's of using "inappropriate methods" that gave a false picture of China's financial outlook.
The ministry complained that Moody's failed to give enough weight to economic measures. The government is trying to make the economy more productive by giving market forces a bigger role and through supply-side reform, or shrinking bloated industries such as steel and cement in which supply exceeds demand. The supply gluts have depressed prices and led to financial losses.
"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.
Economic growth, reported by the Chinese government, fell from 14.2 percent in 2007 to 6.7 percent last year, though that still was among the world's strongest.
The Finance Ministry noted the growth rate ticked up to 6.9 percent in the quarter ending in March and said tax revenue rose 11.8 percent in the first four months of the year.
China is trying to steer the economy to slower, more sustainable growth based on domestic consumption instead of investment and exports. But growth has been slowing more than planners wanted, raising the risk of politically dangerous job losses. China has responded by flooding the economy with credit.
"The planned reform program is likely to slow, but not prevent, the rise in leverage," Moody's said. "The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole."
The agency changed its outlook to stable from negative, saying risks are now balanced and that growth will likely remain relatively strong. Moody's expects economic growth to decline to close to 5 percent over the next five years.
Information for this article was contributed by Kelvin Chan of The Associated Press.
Business on 05/25/2017