China downgraded by Moody's for first time since 1989 over debt fears – business live

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Beijing has hit back after being downgraded by Moody’s for the first time since the Tiananmen Square protests

12.12pm BST

After being rattled by Moody’s, China’s stock market managed to recover its losses by the close of trading.

The Shanghai Composite Index closed up 1 point, or 0.06%, as investors digested the news that China had been downgraded by one notch to A1 (the fifth-highest rating).

“It’s going to be quite negative in terms of sentiment,particularly at a time when China is looking to de-risk the banking system (and) when there’s going to be some potential restructuring of SOEs.”

“After being very much at the front and centre of global risk sentiment at the beginning of last year, the Chinese slowdown story has been almost forgotten, with politics throughout Europe and the U.S. taking the limelight.”

11.54am BST

The price of iron ore traded in the Chinese city of Dalian slumped by 7% today, partly thanks to Moody’s downgrade.

Local reports also blamed signs that stockpiles are building up (suggesting a dip in demand).

Spot iron ore down heavily, but not as much as Dalian futures.

MBIOI-62 -2.4% to $60.52
MBIOI-58 -2.7% to $40.02https://t.co/Wk3Q4ZgdYi pic.twitter.com/EMAWqxAc44

11.22am BST

Fred Goodwin might still get his day in court, whether he likes it or not.

A high court judge has agreed to adjourn the case brought by thousands of Royal Bank of Scotland customers who say they were misled into supporting its rights issue in 2008, before the financial crisis.

Jonathan Nash QC, representing the shareholders, told the judge on Wednesday that while prospects of a settlement remained good more time was needed.

Asked by Hildyard what the impediments to a deal were, Nash said the shareholder group was not able to contact all its members. There were a “small number of shareholders whose current address does not appear to be correct”, he added.

RBS case adjourned. Fri was day off anyway. Scheduled break for 2 wks after that. Plenty time to do deal/decide to press on/see group split?

11.15am BST

UBS’s Paul Donovan has a refreshingly blunt take on the Moody’s downgrade:

One of the credit rating agencies – no one cares which one – lowered China’s credit rating from something to something else – no one cares what. There was a flicker of interest in Asian markets (an unusual reaction to a credit rating agency move), but there is no real new information.

Solid summary of the China downgrade from Paul Donovan at UBS pic.twitter.com/Y06By2RGFu

11.12am BST

Karishma Vaswani, the BBC’s Asia business correspondent, has explained why Moody’s downgrade will have irked the Chinese leadership:

Remember – this is a critical year for President Xi Jinping, who faces a key political congress towards the end of the year. A strong economy gives him credibility and legitimacy – China observers tell me that the perception of stable growth is crucial for him at this time.

This is why negative assessments from international financial institutions like Moody’s on Chinese debt are unlikely to go down well in Beijing.

10.55am BST

Over in Sofia, European Central Bank policymaker Peter Praet has warned that Europe’s recovery could falter if the ECB tightens policy too quickly.

Praet told his audience that Europe’s economy was recovering, thanks to domestic demand (thanks to the actions taken by the ECB!). But wage growth is still muted, meaning inflationary pressure is low.

While we are certainly seeing a firming, broadening and more resilient economic recovery, we still need to create a sufficiently broad and solid information basis to build confidence that the projected path of inflation is robust, durable and self-sustained.

First, underlying inflation pressures still give scant indications of a convincing upward trend as domestic cost pressures, notably wage growth, remain subdued. And, second, the economic recovery and the outlook for price stability remain conditional on the very substantial degree of monetary accommodation, including our forward guidance. Without this support, the progress towards a sustained adjustment that we see in our projections will likely be slower or even stall.

The problem lies in the demand, not in supply; thus QE is unlikely to prove inflationary, chart Peter Praet @ecb https://t.co/NHlpTSjCZ7 pic.twitter.com/SnwGQ7U2bj

10.34am BST

Mining shares in London have been hit by the Chinese downgrade.

Rio Tinto has shed 1.2% while Anglo American is down 0.8%, following the drop in commodity prices (as China is a huge consumer of iron, nickel, copper, etc).

The heavy sell-off in commodities following China’s debt rating downgrade has taken its toll on the UK’s mining stocks (-1.10%). Copper futures cheapened by 1.29%, as iron ore future slid more than 5%.

10.07am BST

Guardian Business is launching a daily email.

Besides the key news headlines that you’d expect, there’ll be an at-a-glance agenda of the day’s main events, insightful opinion pieces and a quality feature to sink your teeth into each day.

Related: Business Today: sign up for a morning shot of financial news

9.51am BST

Over in the City, shares in Marks & Spencer have hit their highest level in 12 months.

That’s a little surprising, as the retailer reported a 10% fall in underlying profits (and a 65% slump on a pre-tax basis) this morning, and another fall in clothing sales.

Trying to judge which M&S clothing numbers matter most. Total sales fall or full price sales growth for instance? Each tells different story

But @marksandspencer CEO Steve Rowe is confident the business is on track. Market share full-price gains are name of the game for him

M&S’s Steve Rowe is actually an incredibly impressive media performer. Plays the “I’m just an honest guy” role to perfection.

Related: M&S profits dive by nearly two-thirds as clothing sales slide

9.29am BST

Newsflash: Moody’s has just downgraded 26 Chinese organisations, following today’s sovereign credit rating downgrade.

They’re all classed as GRIs, or “non-financial corporate and infrastructure government-related issuers”.

The 26 issuers comprise 1) 17 GRIs and rated subsidiaries that are ultimately owned by the central government (central GRIs), and 2) nine GRIs and rated subsidiaries that are ultimately owned by regional and local governments (local GRIs).

9.16am BST

Luc Froehlich, head of investment directing for Asian fixed income at Fidelity International, believes China has got a grip on its economic problems.

He says:

“Today’s downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining economic growth rates and ongoing structural reforms.

“Despite these mounting pressures, we are confident that China’s central bank and its regulators are firmly in control of the situation. In particular, China’s recent regulatory tightening should help deflate the country’s credit markets and lead to long-term market stabilization. ”

9.12am BST

Moody’s downgrade has hit the price of commodities in China.

Iron ore shed 6%, with steel and coke prices also suffering, as traders anticipated weaker demand for metals and energy.

Losses seen across industrial #commodity futures in #China, led by #IronOre tumbling 6.74% by noon; #steel rebar down 3.1% & coke down 2.3% pic.twitter.com/nrV4bqQ918

8.49am BST

It’s easy to be dismissive of credit rating firms, given their shortcomings in the run-up to the financial crisis.

Today’s downgrade doesn’t tell us anything massively new; it’s no secret that China is facing rising debts, slowing growth, and a tricky tightrope from an industrial economy to a service sector one.

Moody’s gives the broader sector a baseline credit assessment of Baa3 based on indicators like loan-to-deposit ratios and counterparty risk. But because the government owns much of the banking system and—it is assumed—would provide it with support in a crisis, banks are in practice able to issue debt at higher ratings. Bank of China , one of the country’s big four banks, has a base rating of Baa2, but any debt it issues is rated at A1, four notches higher.

By this logic, a notch down in China’s rating should push down those of issuers that rely on government backing. In July 2007, when Moody’s upgraded China, it simultaneously upgraded seven Chinese banks. Currently, Moody’s deems about half of the state-owned entities it rates as being in the “moderate credit risk” bucket. Thirteen of those companies would fall into junk territory if their ratings were lowered a notch.

Good analysis of impact of China downgrade: will make it more expensive for Chinese firms to borrow https://t.co/fjO4bytWUn

8.30am BST

Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, believes Beijing won’t be happy about Moody’s move:

Balding told Bloomberg that:

“It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures.

“it doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”

Moody’s downgraded China’s credit rating overnight, to A1 with a stable outlook, from Aa3. There was an initial risk-averse reaction but this has been mostly reversed in the last few hours.

The stable outcome and the fact that rating agencies are more market-following than market-leading, not to mention recent Chinese equity market under-performance, all argue that there’s no new news in this move. And so, the market reaction is to buy the dip, yet again.

S&P has had China on outlook negative since February 2016, indicating there is a potential downgrade brewing. But S&P currently rates China one notch above Moody’s and Fitch, so a cut would not break new ground.”

8.10am BST

The last time Moody’s downgraded China was November 1989, a few months after the Tiananmen Square protests were crushed.

Deng Xiaoping was the boss when China last got a downgrade form Moody’s https://t.co/q5erjBFTL8 pic.twitter.com/RT1GP7CGkW

7.57am BST

The Chinese government has tried to dismiss Moody’s downgrade.

It claims the move is based on an inappropriate, “pro-cyclical” approach, that is too gloomy about China’s current situation and future potential.

“These viewpoints overestimate the difficulties facing the Chinese economy and underestimate the capabilities of China to deepen supply-side structural reform and expand overall demand.”

7.44am BST

Big news from China this morning. Moody’s has downgraded the country’s credit rating for the first time in almost three decades.

Moody’s warned that China’s financial strength is likely to deteriorate in the coming years, as its economy slows and its national debt keeps rising.

The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.”

“Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage.

The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”

#China stocks and currency got hit by Moody’s rating downgrade. Shanghai Comp drops to lowest since Oct. pic.twitter.com/YUxL4xGZuw

7.23am BST

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Today we’ll be watching the US dollar. After being buffeted by Donald Trump’s travails, the greenback is clawing back some ground as investors wonder whether the Federal Reserve could raise interest rates again in June.

The US dollar appears to have caught itself a bit of a break yesterday ahead of the release of the latest Fed minutes.

In the last week or so market odds of a June rate rise have fluctuated quite sharply, though the consensus still remains that it remains more or less a done deal. I still have doubts about that but the Fed do appear to have boxed themselves into a corner for a move in June, and one that they may find difficult to extricate themselves from if things do go a bit pear shaped in the next few weeks.

Our European opening calls:$FTSE 7492 +0.08%
$DAX 12654 -0.04%
$CAC 5342 -0.11%$IBEX 10932 +0.14%$MIB 21426 +0.05%

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Source: china
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