Moody’s Investors Service has cut its rating on China’s debt to A1 from Aa3 and changed the outlook to stable from negative. It cited the likelihood of a “material rise” in economy-wide debt and the burden that will place on the state’s finances. The offshore yuan dipped after the downgrade. President Xi Jinping and other top leaders are seeking to rein in credit risks in the financial system, while ensuring there is enough lending to keep the economy growing by at least 6.5% this year. Total outstanding credit climbed to about 260% of GDP by the end of 2016, up from 160% in 2008, according to Bloomberg Intelligence. “It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures in China,” said Christopher Balding, Associate Professor at the HSBC School of Business at Peking University in Shenzhen. That said, “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.” Overseas institutions’ holdings of onshore bonds dropped to CNY830 billion as of the end of March, from CNY853 billion three months earlier, People’s Bank of China data show. That is less than 1.5% of CNY63.7 trillion of outstanding notes. “The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced,” Moody’s said in the statement. “The erosion in China’s credit profile will be gradual and, we expect, eventually contained as reforms deepen,” Moody’s added.

Moody’s cut Hong Kong’s credit rating from Aa1 to Aa2, following its first downgrade to China’s rating since 1989, citing the city’s “close and tightening” linkages with the mainland. Total mainland-related lending in the city rose to HKD3.6 trillion at the end of 2016, up 3.5% compared with last June, while other non-bank exposures increased by 11.4% to HKD1.2 trillion. Moody’s also cut the ratings of 26 Chinese state-owned enterprises (SOEs). A downgrade could increase the debt financing cost for the companies. Among the affected companies were China Mobile, China National Offshore Oil Corp (CNOOC) and China Petrochemical Corp (Sinopec). Moody’s downgraded Agricultural Bank of China one notch, while the ratings agency left its ratings on China’s three other large state-owned banks unchanged. Dagong Global Credit Rating Co maintained its local and foreign currency sovereign credit ratings for China at AA+ and AAA respectively, both with stable outlooks.

China’s Ministry of Finance responded to Moody’s sovereign downgrade with a statement on its website saying the agency used “inappropriate” methods to overestimate the country’s economic difficulties and underestimated Beijing’s ability to handle such challenges.“Moody’s views that the debt scale of the real economy will grow rapidly, that reforms are having difficulties showing effects, and that the government will continue to stimulate growth, overestimated the difficulties China is confronting and underestimated the government capability in deepening structural reform and appropriately expanding aggregated demand,” the Ministry said.

The People’s Bank of China (PBOC) will adjust the formula for calculating its daily yuan reference rate to ward off potential capital outflows resulting from the United States Federal Reserve’s impending rise in interest rates. A “counter-cyclical adjustment factor” would be added to the closing exchange rate and to the basket of currencies for calculating the yuan’s daily fixing, or the mid-point rate from which the yuan is allowed to trade by up to 2%. The change would mean a stronger state hand and less of a role for market forces in setting the rate. But a “countercyclical” factor in the pricing model could help offset the “herd effect” and bring the yuan’s central parity in line with economic fundamentals, the PBOC said. Balding, Associate Professor at Peking University’s HSBC Business School in Shenzhen, questioned the need for the change given the yuan’s extremely low volatility in recent months. “The only logical explanation for the change is that they are trying to provide greater discretion in managing the yuan’s value,” Balding said. He added that the new factor would reduce the yuan’s transparency.

China defended its yuan exchange-rate policy and its interventions in the foreign exchange market, saying it hasn’t manipulated its currency but instead sacrificed some of China’s interests to help the world, including the U.S. The yuan comments were part of a 117-page report on Sino-U.S. trade relations published by the Ministry of Commerce (MOFCOM), and are a response to allegations that China is deliberately manipulating its exchange rate to help its exporters. Allegations from Washington about Chinese currency manipulation were “neither objective nor fair”, the Ministry added. Beijing has made great efforts to stave off a fast yuan depreciation, depleting its foreign exchange reserves by nearly USD1 trillion since June 2014, or a quarter of the total.

China will ease restrictions on foreign investment, including a further opening up in sectors such as services, manufacturing and mining, according to a news release issued after a meeting of the Chinese Communist Party’s Central Leading Group for Deepening Overall Reform. The catalogue on foreign investment will be adapted accordingly. Utilization of foreign capital in the first four months of 2017 reached CNY286.4 billion, a slight drop of 0.1% year-on-year. During the same period, China registered 9,726 new enterprises with foreign investment, a year-on-year increase of 17.2%. The meeting also approved the setting up of trans-regional environmental protection bodies to better handle air-quality and environmental problems.

A new 9,900 km railway cargo route linking Shenzhen with the Belarus capital of Minsk has been inaugurated. A train with 41 containers, packed with Chinese products from mobile phones to car parts, is expected to take two weeks to reach Minsk via Central Asia. Chinese cities are jockeying to launch “direct cargo trains” to Europe to support President Xi Jinping’s ambitious “Belt and Road Initiative”. The inland city of Chongqing now has a regular rail cargo service to Duisburg in Germany, and the export hub of Yiwu in eastern China has similar services to London and Madrid. According to state-owned rail operator China Railway, 29 Chinese cities, including Shenzhen, have launched direct freight lines to Europe, although most routes are along the same track. China Brilliant Group is a key backer of the new Shenzhen-Minsk freight link. As part of a joint venture with German logistics firm DHL, China Brilliant had invested CNY80 million into building warehouses along the route, training staff, and upgrading surveillance. Before the opening of the new link, many electronics firms in Shenzhen had been forced to send their shipments to Yiwu for forwarding to Europe because Shenzhen lacked a direct link with the continent. There will be one westbound train service a week, and a return service will start in June. Eventually, the service might be extended to Hamburg in Germany. DHL Greater China Chief Executive Steve Huang said China’s belt and road plan also offered opportunities for companies to combine maritime and rail routes. He said transport by rail was faster than sea freight and cheaper than air cargo. A shipment usually takes more than a month to get from China to Europe by sea, the South China Morning Post reports.

A committee to coordinate freight rail services on the China Railway Express between China and Europe was launched in Beijing. 33 stakeholders are members of the committee. Measures to be taken include establishing transfer hubs to assemble container cars, launching an international information service, and opening hotline number 95306 for clients to check on their cargo. A cold container information center will also be launched.

China’s Ministry of Commerce (MOFCOM) announced the final ruling on an investigation into sugar imports, deciding to implement a three-year duty on out-of-quota shipments. China now allows 1.95 million tons of sugar imports at a tariff of 15% as part of its commitment to the World Trade Organization (WTO). Imports beyond this are subject to a 50% levy. The new ruling will add an extra 45% duty to these imports to May 21, 2018. The duty will be reduced to 40%, then 35% in each subsequent year, according to the statement. The investigation, launched last year in response to pleas by the domestic industry, found that increasing imports were causing serious harm to local producers. WTO members may take measures to protect their domestic industries from any increase in imports which causes, or threatens to cause, serious problems for local producers. The move could dent imports from countries such as Brazil and Thailand as it will close the big gap between Chinese and international prices. Chinese sugar prices are around double those on the London market. But traders said the higher tariffs will also likely spur increased smuggling across China’s porous southern border, while some imports from major producers may be shipped through third-party nations excluded from the tariffs. The latest ruling exempted about 190 smaller countries and regions from the new duty, including smaller producers such as the Philippines and Pakistan as well as Myanmar. Last year, China imported 3.06 million tons of sugar, down 36.8% from 2015, the South China Morning Post reports.