The downgrade overnight from Moody’s comes at a time when the Chinese government is wrestling with the twin challenges of slowing economic growth and rising financial risks emanating from soaring debt.
While the latest rating cut is likely to marginally increase the cost of borrowing for the Chinese Government and its state-owned firms, it remains comfortably placed within the investment grade range. Also, most Chinese sovereign debt is held by domestic investors, shielding the country from any major negative impact of the downgrade. Still, Moody’s move underscores doubts that President Xi Jinping’s government will succeed in simultaneously shedding excessive leverage in the system, while keeping the economic growth engine chugging above the 6.50% growth target. The news sent the Yuan -0.20% lower against the dollar, with USDCNH currently hovering around 6.8800.