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Moody’s China downgrade rattles Asian market

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Moody’s China debt downgrade creates market worries

Moody’s downgrade of China’ s sovereign credit rating made Chinese stocks to  fall and the Australian dollar skid as worries grow about the global impact of slowing growth and rising debt in Asia’s economic powerhouse.

Shares elsewhere in Asia also slipped, with MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.3 percent, despite modest gains on Wall Street overnight.

Japan’s Nikkei stock index pared its earlier gains but was still 0.5 percent higher.

“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,” said Kyoya Okazawa, head of global markets, Japan at BNP Paribas Securities in Tokyo.

The move would likely have only a short-term market impact, he said.

The Australian dollar, regarded as a proxy for China due to the country’s status as a major trading partner, fell as low as $0.7443 soon after the Moody’s announcement.

The offshore yuan slipped, but later recouped its losses. The Shanghai stock index also was off earlier lows but was still down 0.4 percent.

Moody’s cut China’s rating by one notch to A1 from Aa3, saying it expects the financial strength of the world’s second-biggest economy will erode in coming years as growth slows and debt continues to rise.

China’s massive debt has been at the center of concerns among economists and Beijing is walking a fine line as it tries to contain financial risks.

Moody’s has no specific timetable for re-visiting China’s rating but will monitor conditions on a regular basis, Marie Diron, associate managing director of Moody’s Sovereign Risk Group, told Reuters. She said the risks to China’s financial system were “broadly balanced.”

China’s finance ministry said the downgrade by Moody’s was based on inappropriate methodology, saying it was exaggerating difficulties facing the economy and underestimating reform efforts.

The downgrade would probably not have a much broader spillover impact on global financial markets, said Suan Teck Kin, economist for United Overseas Bank in Singapore, noting that Moody’s economic growth estimate seemed “too pessimistic”.

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.

The U.S. dollar pulled away from recent 6-1/2 month lows as investors pored over President Donald Trump’s first full budget plan.

Containing no surprises, the plan called for an increase in military and infrastructure spending but also cuts to social spending in areas such as healthcare and food assistance.

U.S. Treasury Secretary Steven Mnuchin said he hoped to get tax reform passed this year, though this would not happen by August.

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