China's Stocks, Yuan Erase Losses Triggered by Moody's Downgrade

(Bloomberg) -- China’s financial markets quickly brushed off Moody’s Investors Service’s decision to cut its rating on the nation’s debt for the first time in almost three decades, with stocks, bonds and the currency little changed.

The Shanghai Composite Index closed up 0.1 percent, after slumping as much as 1.3 percent to approach the key 3,000 level. The yuan was steady against the dollar, while the yield on the 10-year government debt held at 3.67 percent.

The Moody’s downgrade to A1 from Aa3 comes at an awkward time for China’s authorities, who called the cut “absolutely groundless.” A campaign to reduce risk in the financial sector has caused local investors to desert the equity and bond markets, while traders have been pushing back against the central bank’s efforts to shore up the currency. Wednesday’s late reversal in the Shanghai gauge was likely helped by government intervention, according to Core-Pacific Yamaichi HK.

“It seems that regulators do not want the Shanghai benchmark to fall below 3,000, so when the index is close to that level, they will start buying for stability," said Castor Pang, strategist at Core-Pacific Yamaichi HK in Hong Kong.

China's Stocks, Yuan Erase Losses Triggered by Moody's Downgrade

Moody’s cited the likelihood of a “material rise” in economy-wide debt and the burden that it will place on the state’s finances. China’s Ministry of Finance said in a statement that the ratings company underestimated the capability of the government to deepen reform and boost demand. Total outstanding credit climbed to about 260 percent of GDP by the end of 2016, up from 160 percent in 2008, according to Bloomberg Intelligence.

Moody’s lowered China’s credit-rating outlook to negative from stable in March 2016, citing rising debt, falling currency reserves and an uncertainty over authorities’ ability to carry out reforms. About a month later, S&P Global Ratings warned that rising local debt was pressuring the nation’s rating.

The ChiNext gauge of mostly technology shares gained 1 percent on the mainland, erasing a loss of as much as 1.6 percent. Hong Kong’s Hang Seng Index advanced 0.1 percent.