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.
The moment Moody’s announced about the rating downgrade, foreign-exchange markets were quick enough to react to the downgrade. As a result, Australian dollar skidded 0.4% at $0.7450 after falling as low as $0.7439, post the announcement (given that China is among Australia’s largest export markets). However, the current downgrade is regarded as non-game changer for Australian dollar in the long term.Aussie dollar eased slightly and recovered to $0.7462 (down 0.16%) as the reaction to the downgrade was also relatively subdued. Nonetheless, the approach would be a cautious one over the short-term.
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