Saturday, 21 April, 2018

Economic Watch: Moody's downgrade of China ratings draws distrust, faces test

Laurie Berry | 25 May, 2017, 17:15

"The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows", Moody's said in a statement, changing its outlook for China to stable from negative.

The cut to China's long-term local currency rating to A1 from Aa3 puts the country on a par with the Czech Republic, Estonia, Israel, Japan and Saudi Arabia. The country has for years been pumping credit-fueled stimulus as part of efforts to achieve growth internally rather than relying on exports, but this has raised fears about China's rising debt levels.

In a statement, the ministry said the downgrade was based on an "inappropriate method" and that Moody's overestimated the difficulties China's economy faced, Reuters reports.

But Moody's rejected India's claims - raising concerns over India's debt burden and bad loans worth United States dollars 136 billion - and said, according to the report: "Not only was India's debt burden high relative to other countries with the same credit rating, but its debt affordability was also low".

"The economy is likely to slow but the forecast of Moody's is too pessimistic", said Zhao Quanhou, a senior research fellow of the Chinese Academy of Fiscal Science, adding that the rating agency had, to some extent, lost its objectivity.

While China's debt risks have been swelling for years, the cut by Moody's comes as some of those pressures ease. While Beijing did acknowledge that it has built up a lot of debt, the Chinese government said it is confident that it can contain those risks.

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The ministry said it was unlikely for China's government debt risks to see major changes in 2018-2020, compared to 2016. Moody's added that the erosion in China's credit profile will be gradual and eventually contained as reforms deepen. It sheds new doubt on the gradualism approach that Beijing is taking to address the debt problem and its ability to simultaneously cut debt in the financial system and keep GDP growth steady at 6.5% a year. Standard & Poor's rates China's debt a notch higher.

Like China, India has also expressed concerns about "inappropriate methodology" used by credit ratings agencies.

Mei said China's economic performance this year had exceeded market expectations and criticized Moody's for including debt at state-owned enterprises (SOEs) and local government financing vehicles as indirect government liabilities.

According to China's laws on guarantee and budget, local government contingent liabilities include no more than the guaranteed debt they issue using loans from foreign governments or global organizations.

"Moody's made a wrong hypothesis to mix corporate and government debts, which is an obvious misreading", said Qiao Baoyun, an economist with Central University of Finance and Economics.

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