The decision of Moody's to downgrade China's credit ratings has stirred distrust of its authority and will face a severe test as the world is counting and betting on the second largest economy to continue driving global growth.
In a statement released Wednesday, the rating agency said it had downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.
It attributed the move to expectations that China's economy-wide leverage would increase over the coming years, planned reform program would likely slow, but not prevent the rise in leverage, and sustained policy stimulus would cause rising debt.
Upon release, however, the downgrade was cast into doubt.
"The economy is likely to slow but the forecast of Moody's is too pessimistic," said Zhao Quanhou, a senior research fellow of the Chinese Academy of Fiscal Science, adding that the rating agency had, to some extent, lost its objectivity.
Echoing Zhao's remarks, Sun Binbin, chief analyst with TF Securities, believes the downgrade reflected that Moody's "does not quite understand China's development pattern and path" and expects limited impact on the economy as the fundamentals are stable.
Doubts from economists are reasonable as the Chinese economy roared back strongly in the beginning of 2017, with substantial rebounds in nearly all indicators.
Gross domestic product grew 6.9 percent in the first quarter, above the full-year target of 6.5 percent and the 6.8-percent growth in the fourth quarter of 2016. For the first four months, the fiscal revenue, a gauge of the government's ability in macroeconomic regulation, jumped 11.8 percent, compared to 8.6 percent for the same period last year.
Although the momentum has been somewhat weakening since April, analysts still agree that the economy will remain resilient.
China's Ministry of Finance (MOF) swiftly dismissed the new ratings on Wednesday, saying it was based on a "pro-cyclical" rating approach which is "inappropriate."
"These viewpoints, to some extent, overestimate the difficulties facing the Chinese economy and underestimate the capabilities of China to deepen supply-side structural reform and expand overall demand," the MOF said in a statement.
The ministry highlighted the role of ongoing supply-side structural reform in sustaining the economy.
"China's economy is expected to maintain steady and relatively fast growth thanks to the deepening reforms in state-owned enterprises, finance, taxation and pricing, in addition to the implementation of the Belt and Road Initiative," the MOF said.
The ministry also refuted Moody's expectations that China's government debt-to-GDP ratio would rise to 40 percent in 2018.
"China's government debt risks are controllable overall, with a debt ratio of 36.7 percent in 2016, well below the 60-percent warning line of the European Union and lower than those of other major developed or emerging economies," the MOF said. "Government borrowing will be under strict control under the backdrop of supply-side structural reform. And expected medium-to-high GDP growth in the coming years will also provide fundamental support for reining in local government debt risks."
The ministry said it was unlikely for China's government debt risks to see major changes in 2018-2020, compared to 2016.
The National Development and Reform Commission (NDRC), China's top economic planner, said Wednesday that deleveraging, as a major task of the country's supply-side structural reform, was making progress and China's debt risks were controllable.
China's overall leverage ratio is at a medium level internationally and it is stabilizing, said the NDRC, citing data from the Bank for International Settlements.
By the end of September 2016, China's leverage ratio stood at 255.6 percent, lower than 255.7 percent in the United States, Britain's 283.1 percent and Japan's 372.5 percent.
Moody's also claimed that increases in China's local government financing platforms and debt owed by SOEs would lead to rising government contingent liabilities.
The ministry said this was "baseless."
According to China's laws on guarantee and budget, local government contingent liabilities include no more than the guaranteed debt they issue using loans from foreign governments or international organizations.
The debt owed by local or central SOEs must only be borne by the enterprises themselves instead of governments, according to China's corporate laws.
"Moody's made a wrong hypothesis to mix corporate and government debts, which is an obvious misreading," said Qiao Baoyun, an economist with Central University of Finance and Economics.
"China has established mechanisms to guide local governments' fund-raising and make clear boundaries between government debts and other financing vehicles."
