Fund managers have said last night's downgrade of China's debt by credit ratings agency Moody's was "no surprise" and the immediate market impact will be limited, although they have warned about the longer-term implications for investor confidence.
China's mainland stockmarket fell immediately after its first downgrade since 1989, as its long-term local currency and foreign currency issuer ratings were taken down one notch to A1 from Aa3.
The Shanghai Composite index dropped 0.6% to 3,043 as at 7.15am GMT on Wednesday, a seven-month low, although it had rebounded slightly from lows of 3,022 earlier in the trading day.
Moody's said it expects the financial strength of China's economy will weaken in the years ahead as growth slows and debt continues to rise.
However, China's Finance Ministry said the downgrade overestimated the risks to the economy and was based on "inappropriate methodology".
Fund managers have said the downgrade was expected, which explains the muted market reaction so far.
Aviva Investors' head of emerging markets and Asia Pacific equities Will Ballard said: "Moody's downgrade of China's sovereign debt rating today should come as little surprise to investors.
"In fact, the Chinese are well aware of some of the concerns highlighted by Moody's.
"President Xi Jinping has already called for increased action from the government to control financial risks and improve co-ordination between the various regulatory authorities. Valuations are also already low.
"The HSCEI, which represents Chinese companies listed in Hong Kong, is one of the cheapest equity indices. It trades on only 8.5x expected earnings, compared to the broader MSCI Emerging Markets index on 13x. With that in mind, perhaps it is no surprise that it was only off 0.06% on this announcement."
'Mild market reaction'
Aidan Yao, senior emerging Asia economist at AXA IM, echoes Ballard's view: "Fundamentally, Moody's decision to cut China's rating based on a deteriorating debt condition comes as no surprise. Such concerns have long been flagged by international agencies."
He added that the Chinese government has been making adjustments alongside "comprehensive and co-ordinated action on deleveraging" by regulators.
"We [therefore] find the timing of Moody's decision somewhat surprising, even though the decision itself is hard to argue with."
Aberdeen Asset Management fixed income investment manager Edmund Goh said: "The market reaction to this should generally be mild.
"The exception would be some Tier 1 US dollar bonds issued by state-owned enterprises which derive most of their credit strength from the sovereign rating.
"Onshore Chinese investors will largely ignore the downgrade. Foreign participation in the onshore market is too small to move the market there.
