China: Rating downgrade by Moody’s suggest financial strength will erode in future – RBC CM

Sue Trinh, Head of Asia FX Strategy at RBC Capital Markets, explains that Moody’s cut China’s long-term sovereign rating one notch, from Aa3 (neg) to A1 (stable) and the rating change reflects the expectation that China’s financial strength “will erode somewhat over the coming years.”

Key Quotes

“It is the first downgrade by Moody’s since 1989 and the first rating change since 2010. Needless to say, a ratings downgrade has been long overdue. Following the ratings action, Moody’s is now on par with Fitch (A+ rating), with S&P one notch above at AA-. CNH sold off sharply on the news, with USD/CNH spiking 80pips to 6.8900. However, the fact that the rating wasn’t cut by more given the deterioration in China’s debt metrics in the past decade saw CNH quickly recoup losses.”