China’s financial system under stress – Is pressure penetrating through Australia

Highlighting risks in the financial system, Moody’s has recently downgraded China’s sovereign rating to A1 from Aa3 at the back of increasing debt levels. However, the outlook has been changed to stable from negative. The downgrade reflected Moody’s expectation that the economy-wide leverage will increase further over the coming years. The planned reform program is said to be slow and might not prevent the rise in leverage. Further, the stimulus in sustained policy might further contribute to rising debt across the economy. Therefore, the government’s direct debt burden is expected to rise towards 40% of GDP by 2018 and hit 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%) and higher than the median of Aa-rated sovereigns (36.7%). However, the stable outlook still signals for balanced risks at the A1 rating level. China’s credit profile still incorporates several important strengths, most notably its very large and still fast-growing economy.   

 

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