A pedestrian walks past a branch of the Industrial & Commercial Bank of China (ICBC) in Fuzhou, Fujian Province, China.
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Moody’s Investors Service lowered its outlook on eight Chinese banks to negative from stable on Wednesday, following a similar downgrade of the Chinese government’s credit rating a day earlier.
The rating agency also cut Hong Kong’s outlook to negative from stable, citing the close political, institutional, economic and financial ties between Hong Kong and mainland China.
Lenders that were downgraded included China’s four major lenders, Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China and China Construction Bank Corporation.
“The change in outlook from stable to negative for these banks is directly attributable to a possible deterioration in the central government’s rating or credit quality, given the change in outlook for the sovereign rating,” Moody’s said.
Moody’s on Tuesday lowered its outlook for the Chinese government’s credit rating to negative from stable, saying it expects support from Beijing and possible bailouts for distressed local governments and state-owned enterprises would weaken China’s fiscal, economic and institutional strength.
The other banks on the list were China Development Bank, Agricultural Development Bank of China, Export-Import Bank of China and Postal Savings Bank of China Co.
The downgrades highlight concerns about China’s rising debt levels and its impact on GDP growth in the world’s second-largest economy.
Moody’s also lowered its outlook on 22 Chinese local government financing instruments to negative from stable.
LGFVs are companies set up by local governments that invest in infrastructure and social projects.
The rating agency said the LGFV downgrades were primarily a result of the change in the outlook for the Chinese government’s credit rating from “stable” to “negative”. They were due to increased risks due to lower medium-term economic growth and pressures from the ongoing crisis in the real estate sector.
“These trends underscore the increasing risks associated with policy effectiveness, including the challenge of designing and implementing policies that support economic realignment while preventing moral hazard and containing the impact on the government’s balance sheet,” Moody’s said in a statement Explanation.
Moody’s attributed Hong Kong’s downgrade to its close ties with mainland China: “Given the close relationship inherent in the ‘One Country, Two Systems’ policy; in the economy, given the very strong trade ties between the two; and in the financial system, given the integration of the Hong Kong banking system into the mainland and its role as a… “conduit for financial flows into the regional and global financial systems.”
Not a “fair” demotion
“I don’t think it’s a fair downgrade of our economic outlook. In fact, we have a very strong buffer in terms of our financial system, our resilience and our economic resilience… and economic growth is about 3.2% this year. ” Paul Chan, Hong Kong’s finance minister, told CNBC’s “Capital Connection” on Thursday.
Chan remained optimistic about Hong Kong’s economic resilience, citing three growth drivers: services exports, capital investment and consumption, or positive growth. He pointed out that external circumstances are still difficult and exports will therefore continue to decline somewhat in the future.