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China's Finance Ministry on Wednesday dismissed a credit downgrade by Moody's, saying it is based on "inappropriate methodology" and argued that the rating firm has overestimated the difficulties faced by the world's second largest economy.
The ministry's statement came after Moody's Investors Service on Wednesday downgraded its rating for China for the first time since 1989 out of concerns that the Chinese government's efforts to spur economic growth with fiscal policy will lead to rising debt.
"China's economy made a good start in the beginning of this year, showing that the results of the reforms are manifesting," the Ministry of Finance said in a statement posted on its official website.
Moody's downgraded China's long-term local currency and foreign currency issuer ratings one notch to A1 from Aa3 and changed the outlook to stable from negative. Risks are considered to be "balanced" at the A1 rating level.
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, the firm said.
The company also noted that the importance the Chinese authorities have attached to maintaining robust growth will result in sustained policy stimulus, and such government spending will contribute to rising debt across the economy.
As a result of the downgrade, the Shanghai stock market slumped by 0.45 per cent, while the Shenzhen market rose by 0.12 per cent.
Moody's also forecast that China's growth potential will decline to about five per cent in the next five years, for reasons including a smaller working age population and a continuing productivity slowdown.
On the debt front, China's total and private debt is reported to be worth more than 250 per cent of GDP.
In February this year, state-run Xinhua news agency has quoted China Banking Association as saying that the country's bad loans totalled to a whopping $220 billion last year.
Bad loans by commercial banks totalled 1.5 trillion yuan ($220 billion) at the end of 2016.
The Chinese economy expanded by 6.7 per cent in 2016 compared with a peak of 10.6 per cent in 2010. But the country's economy has picked up since the second half of 2016, with its GDP growth reaching 6.9 per cent in the first quarter of this year.
Liu Dongliang, a senior analyst at the China Merchants Bank, was quoted by Global Times today that Moody's decision may have slight influence on Chinese offshore corporate bonds, considering that most holders of these bonds are Chinese investors who have in-depth knowledge of domestic companies' credit status.