Moody's cuts China's ratings for the first time in three decades

Ratings agency, Moody's cut China's sovereign credit rating from A1 to Aa3 last week, for the first time in nearly three decades. The ratings agency also lowered China's outlook from negative to stable.

The cut to sovereign ratings comes as China's financial strength continued to deteriorate amid rising debt concerns. The ratings cut is expected to rise the cost of borrowing from the government, institutions and state-owned enterprises.

China's government responded to the ratings downgrade calling it "inappropriate" with the Ministry of Finance calling the ratings downgrade overestimating the difficulties facing the economy.

Moody's commented on the ratings downgrade noting that it reflected the agency's expectations that the financial strength could begin to erode in the coming years.

Moody's: China's growing debt a concern

China's emphasis on sustaining growth via exports led to increased stimulus programs and borrowing by state-owned enterprises.

It is estimated that China's debt that includes debt owed by the government, household and non-financial companies grew 250% of the GDP.

The high debt levels were also a concern and led to the ratings downgrade, according to Moody's which said that while such high levels of debt were not uncommon, they were mostly stable if the high levels of debt came from stable economies that have strong financial markets and institutions.

The credit cut impact is likely to be felt by companies in China who have exposure to foreign-currency debt. By some estimates, airlines and shipping companies which use foreign-currency debt for financing were seen to be particularly vulnerable.

The ratings agency also cautioned that China’s economy could slow to 5% in the next few years as the economy matures and faces unique challenges.

Earlier this year, China’s authorities set a

Moody's downgrades Hong Kong credit ratings as well

Following the ratings cut on Wednesday, Moody's also downgraded Hong Kong's credit ratings to Aa1 from Aa2.

The ratings downgrade for Hong Kong was as a result of the rise in the credit trends from China which according to Moody's is expected to have a significant impact on Hong Kong's credit profile.

The outlook for Hong Kong was also changed to stable from negative.

Hong Kong authorities brushed aside the ratings downgrade noting that the city was equipped to deal with any challenges. In a sharp criticism to the downgrade, authorities in Hong Kong said that the ratings agency overlooked the economic fundamentals and its resilient banking sector.

Despite the surprise downgrades, the market showed a rather muted response with Bloomberg reporting that the yield premium on China's investment grade notes issued by Chinese firms rising just two basis points after the downgrade.

China's dollar bonds continued to remain a favorite among yield seeking investors with the ratings downgrading doing little to dent sentiment.

Among the emerging markets, besides China, both Brazil and South Africa remain on the ratings agency's watch list suggesting that credit quality continues to worsen in the emerging markets.

Other ratings firms, Fitch and Standard and Poors, have maintained their ratings on China at A+ with a stable outlook from Fitch while Standard and Poors has an AA- and a negative outlook for China. Fitch had last revised China's ratings in November of 2007, while Standard and Poors revised the ratings in March 2016.

China which had been in the forefront of the global economic recovery for a decade and more had started to show signs of the economy cooling off, with latest growth estimates forecasting China's GDP to grow around 6% - 7%.

China's growth slowed to 10.6% in 2010 to just under 7% by 2016.

The IMF forecasts, China's GDP to grow 6.5% but also warned that the nation must reign in the rising total debt levels which stood at 247% of GDP in 2015.

Officials are also targeting a growth rate of 6.5% for 2017, down from 6.7% growth seen the year before.