The Chinese yuan slipped against the US dollar today (though it has trimmed the losses by now) after Moody’s Investor Service made a surprise cut of China’s credit rating for the first time in almost three decades.
Moody’s reduced the country’s sovereign grade from Aa3 to A1 and changed the outlook from negative to stable. The rating agency cited following considerations for its decision:
The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.
Markets have been shocked by announcement initially, sending commodities and Asian currencies down. But currently the shock eased as economists argued that the relatively low level of China’s international debts means that the cut should be not as important for China as it would be for countries more dependent on credit.
USD/CNY was up 0.08% to 6.8905 as of 9:52 GMT today but off the day’s high of 6.8946.
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