Moody’s China Downgrade Seen as ‘Psychological Blow’

Moody’s Investors Service cut its rating on China’s debt for the first time since 1989, challenging the view that the nation’s leadership will be able to rein in leverage while maintaining the pace of economic growth.

Stocks and the yuan slipped in early trading after Moody’s reduced the rating to A1 from Aa3 on Wednesday, with markets paring losses in the afternoon. Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances, while also changing the outlook to stable from negative.

“The combination of slower growth and higher debt poses some contingent liabilities for the government,” Marie Diron, an associate managing director at the sovereign risk group at Moody’s, told Bloomberg Television.

It’s “absolutely groundless” for Moody’s to argue that local government financing vehicles and state-owned enterprise debt will swell the government’s contingent liabilities, according to a response released

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