Last Update: 08:20
ChinaÎ„s main stock index fell one percent on Wednesday dragging the MSCI index of Asia-Pacific shares down 0.2 percent after MoodyÎ„s had slashed ChinaÎ„s credit rating for the first time in almost three decades.
The Australian dollar, regarded as a proxy for China due to the countryÎ„s status as a major trading partner, was down 0.4 percent at $0.7450 after falling as low as $0.7439. The offshore yuan also slipped, but later recouped its losses.
Kyoya Okazawa, head of global markets, Japan at BNP Paribas Securities in Tokyo, said MoodyÎ„s downgrade of ChinaÎ„s sovereign debt came not entirely out of the blue.
"At the end of the day, overseas investors had been taking a cautious stance toward China, even before this, so it was not entirely surprising to the street," he said.
On Wednesday, international ratings agency MoodyÎ„s cut ChinaÎ„s rating by one notch to A1 from Aa3 in its first downgrade of the country in nearly 30 years. The agency said it expected the financial strength of the economy will erode in coming years as growth slows and debt continues to rise.
ChinaÎ„s massive debt has been at the centre of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.
Its total outstanding credit surged to 260 percent of gross domestic product (GDP) by the end of 2016 and the International Monetary Fund has warned that a debt crisis in the country could "imperil global financial stability."
Beijing rejected the assessment, saying MoodyÎ„s had used an "inappropriate" method to assess the risks facing the economy. "It over-estimated the difficulties that the Chinese economy is facing," the Finance Ministry said in a statement.
It added that the governmentÎ„s debt ratio in 2016 was 36.7 percent, lower than major market economies, and that the "expansion of the scale of government debt has been effectively controlled."
Chinese authorities have stepped up regulatory curbs in recent months to defuse financial risks and have cracked down on risky lending practices, with the central bank moving toward tighter policy. But the steps have been largely cautious to avoid braking economic growth too sharply.
Analysts are divided in their opinions on whether or not the downgrade will have a negative impact on these efforts.
While BNPÎ„s Kyoya Okazawa believes the effects will be limited over the long term, Liao Qun, Hong Kong-based chief economist of Citic Bank International, said the ratings cut would certainly hit China negatively by making ChinaÎ„s debt financing more difficult amid rising financing cost.
"This is like throwing cold water when everyone is optimistic about ChinaÎ„s economy," he told the news agency AFP, adding that the move "makes no sense" because ChinaÎ„s growth had improved and the threat of US trade protectionism had subsided. ChinaÎ„s 13th Five-Year-Plan released in 2016 announced an average annual growth rate of above 6.5 percent for 2016-2020. But MoodyÎ„s said it expects ChinaÎ„s growth potential to decline to close to five percent over the next five years, citing diminishing investment, an accelerated fall in the working age population and a continuing dip in productivity.
uhe/mds (Reuters, dpa, AFP)