Bloomberg: China’s Downgrade Could Lead to a Mountain of Debt

Moody’s Investor Services lowered China’s sovereign debt rating by one level in late May for the first time since 1989. The company cited high levels of corporate debt mostly held by state-owned enterprises as the cause. With an increase in the yield premium on bonds, Chinese companies face higher interest rates when borrowing money, indicating greater risk. Hence, raising capital for investments in new goods and acquisitions of other companies has become more difficult. Especially for the shipping and airline industries, these unprofitable rates will “push Chinese companies to borrow even more money from domestic banks” reports Bloomberg News. A turn to the nation’s own finance industry may prove challenging in an already overleveraged economy. Still, the Chinese government and some analysts disagree over the accuracy of Moody’s decision. They contend that China’s corporate debt situation is actually improving and that the downgrade instead reflects ratings companies jockeying for position. The debt woes, leading to reduced Chinese consumption and increased prices, will affect the global economy. – YaleGlobal