Moody's downgrades Hong Kong after China ratings cut

Moody's Investors Service downgraded China's long-term debt ratings late Tuesday to A1 from Aa3 and followed up Wednesday with a downgrade of Hong Kong's local- and foreign-currency ratings to Aa2 from Aa1.

Second, Moody's estimation that relevant reforms in China may not be effective and that the Chinese economy will continue to slow underestimates the Chinese government's ability to deepen supply-side structural reform and moderately expand domestic demand. The ratings agency also changed its outlook for China to stable from negative.

Moody's also forecast that China's growth potential will decline to about 5 per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown.

Moody's also claimed that increases in China's local government financing platforms and debt owed by SOEs would lead to rising government contingent liabilities. The Chinese finance ministry criticized the move and said Moody's overestimated the difficulties facing the economy while failing to give adequate weight to economic reforms underway.

"Moody's expects that economy-wide leverage will increase further over the coming years", the ratings agency said.

Western institutions and media reports have since a year ago repeatedly referred to China's credit risks.

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Moody's, however, changed its outlook for Hong Kong to stable from negative, saying the government's vast cash pile can help the territory ward off financial and economic shocks.

The crucial problem China is facing right now is the unimaginable growth with its debt rates; recent news revealed that it climbed up to 15% of the country's output each year.

Chinese economic growth fell from 14.2 percent in 2007 to 6.7 percent previous year, though that still was among the world's strongest.

Mei added that the China downgrade amounted to a "double standard" compared with how countries in Europe and the United States were treated.

The downgrade places China in the same credit rating bracket as Saudi Arabia, Japan and Israel. Chinese stocks sank Wednesday after Moody's cut the country's debt rating and othe. 'A psychological blow'Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, described the downgrade as "a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures".

UOB economist Suan Teck Kin said Moody's view of slowing growth in China "appears to be overly pessimistic". Moody's had estimated in October that China's "shadow banking" sector - off-balance-sheet lending that evades official risk supervision - totalled $8.5 trillion, or almost 80 percent of GDP.

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