Does China’s credit rating cut matter?

“There’s nothing so surprising about Moody’s… decision to downgrade China’s sovereign debt one notch to A1,” says Andy Mukherjee on Bloomberg Gadfly. Since March 2016, when Moody’s and its rival Standard & Poor’s (S&P) cut their outlook for China, “an eventual demotion has been the most likely outcome”. (S&P continues to rate China one notch higher, while Fitch, the third main ratings agency, already ranks it at its equivalent of A1.) “Still, it mustn’t have been an easy decision, considering the tongue-lashing they got from the Chinese finance minister at last year’s Group of 20 meeting over the ‘bias’ in their assessment.”

The downgrade reflects Moody’s view that recent reforms will not be enough to slow the pace at which debt is rising in the Chinese economy, the agency’s Marie Diron tells Reuters. China’s non-financial debt-to-GDP – including corporate, government and household debt – now stands close to 300% of GDP, with corporate debt accounting for more than half of this. The key force behind this runaway credit growth has been government-led stimulus to boost growth in recent years. Since policymakers remain keen to achieve economic growth targets, any efforts to cut debt levels have been relatively cautious, ahead of a political leadership shuffle set for later this year.

Many critics believe the downgrade will have no real impact. “One of the credit rating agencies – no one cares which one – lowered China’s credit rating from something to something else – no one cares what,” says Paul Donovan of UBS, quoted on FT.com. One reason is that foreign investors play a minimal role in Chinese debt markets, says Lisa Jucca on Breakingviews. The share of Chinese debt held by foreigners is below 3%, in contrast with the 20%-30% seen in most emerging markets. Domestic investors “tend to buy and hold, and are not to be rattled by such global appraisals”. Hence “there won’t be the traditional ripple effect on existing investments” that a downgrade can cause.

Still, “the needle on the doubtometer” seems to have risen, says Douglas Bulloch in Forbes. China appears unable to explain when debt growth will again be exceeded by GDP growth (something that hasn’t happened since 2009). Until that’s resolved, the downgrade will act as an “international warning” on China at an awkward time. The authorities are seeking to have mainland-listed shares included in international stockmarket indices and to open up the domestic bond market to more foreign investors. As those investors start to play a bigger role, China’s “days of being able to ignore the policy criticism of international ratings agencies look numbered”, concludes Jucca.


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