Posted May 24, 2017 17:33:57

Photo: China's sovereign credit rating has been cut from Aa3 to A1 by Moody's. (Reuters)

China's credit rating has been cut one notch by Moody's due to the rising debt needed to keep the economy growing.

The global ratings giant cut China from Aa3 to A1, equivalent to downgrade from AA- to A+ on the scales used by the other major agencies.

Fitch already had China at A+ but Standard & Poor's still has the country at AA- with a negative outlook, meaning another negative ratings action is possible in the near term.

A1 is the fifth highest credit rating and indicates a strong capacity to meet debts, but some susceptibility to adverse changes in circumstances or economic conditions than those with higher ratings.

Moody's fingered China's continued debt-funded stimulus as a key factor behind the downgrade.

"Rising debt will erode China's credit metrics, with robust growth increasingly reliant on policy stimulus," Moody's said.

Chinese authorities had been trying to shift away from debt-funded property and infrastructure investment as the key drivers of economic growth towards a more consumer-focused economy.

However, as growth rates slowed and threatened to fall below targets, China last year ramped up policy stimulus.

"The planned reform program is likely to slow, but not prevent, the rise in leverage," Moody's predicted.

"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."

China's rating outlook has been moved from negative up to stable by Moody's following the downgrade.

However, ANZ's analysts warn that the downgrade could somewhat destabilise China's increasingly fragile financial markets.

"Downgrade by rating agencies could potentially erode the financial soundness of China, creating the risk of a negative feedback loop," they warned in a note.

China's economy appears to be stumbling, and Australia will be squashed if it falls, writes Ian Verrender.

"The downgrade will likely lift the cost of financing of Chinese issuers, especially in the offshore market.

"They will likely turn to onshore financing platforms, including banks, shadow banks and onshore bond markets as these channels do pay less attention to rating actions of international agencies.

"As the loan exposure of the domestic monetary system to local borrowers heightens, the central bank will be cautious in policy tightening in the future, extending the lingering debt concerns further."

Those fears were evident in the Australian dollar's decline from more than 75 US cents last night to 74.5 US cents around 5:30pm (AEST).

Topics: economic-trends, business-economics-and-finance, currency, markets, china