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Asian Credit Monitor: Moody’s Downgrade on China Is the First Domino to Fall

Moody's 24-May downgrade of China's local currency and foreign currency senior unsecured debt rating to A1 (from Aa3) confirms what we wrote back on 1-May that China's economic improvement will not be fast enough to outpace its debt problems. We believe Moody's downgrade is the first of a few more downgrades for China (including S&P to react on its negative outlook and follow Moody's to downgrade China's credit ratings in the near term). Credit ratings of Chinese state-owned enterprises are supported by an implicit support by the Chinese government and, therefore, all deserve a one-notch downgrade, in our view. This wholesale downgrade event will likely cause a repricing event for Chinese credits, as a result.

Rating downgrade risk poses asymmetric downside risk for Chinese-related asse...

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