Date
28 July 2017
Moody's is concerned about China's slowing economy, shrinking foreign reserves and weakening currency, but Xinhua says the downgrade betrays the rating firm's shortsightedness. Photos: CNSA, Bloomberg
Moody's is concerned about China's slowing economy, shrinking foreign reserves and weakening currency, but Xinhua says the downgrade betrays the rating firm's shortsightedness. Photos: CNSA, Bloomberg

Moody’s cuts China outlook and affirms rating

Moody’s Investors Service lowered its outlook on China’s credit rating to negative from stable amid growing concerns about the nation’s slowing economy, shrinking foreign reserves and weakening currency, the Wall Street Journal reports.

The US ratings firm also affirmed the Aa3 grade on its sovereign debt, the newspaper said.

Reacting to Moody’s downgrade, China’s state news agency Xinhua said the move shows the rating agency’s shortsightedness regarding the country’s fiscal matters.

It “reflects a lingering pessimism over the Chinese economy among some overseas institutions, a miscalculation due to a lack of vision on China’s fiscal stability”, Xinhua said in an opinion article.

Moody’s sovereign analyst Marie Diron said: “The negative outlook is a result of [the fact that], on balance over the last few months, the trends have become more pronounced.”

She said while leverage in China has increased rapidly, the ability of state-owned enterprises to service their debt has deteriorated.

Moody’s also expressed doubts about Beijing’s ability to carry out economic reforms.

“What we’ve seen are announcements towards reform but also step-backs,” Diron said, adding that backtracking raises questions about the authorities’ ability to press reform.

A negative outlook typically indicates a higher chance of a rating change over the medium term and, on average, a rating change follows within a year, the Journal said.

Xinhua insists that China’s fiscal strength will remain strong, adding that the government’s ability to pay off its debt is far better than that of many Western economies.

Citing official figures, the news agency said China’s fiscal deficit last year accounted for 2.3 percent of its GDP, below the risk threshold set by international institutions.

Moody’s said China’s government debt reached 40.6 percent of its GDP at the end of 2015 and predicted it would rise to 43 percent in 2017, but that’s still far below the 60 percent threshold used by global institutions, according to Xinhua.

While China’s currency reserves have dropped by US$762 billion over the last 18 months to US$3.2 trillion in January 2016, they still account for up to 32 percent of its GDP at the end of 2015, the news agency said.

It noted that its elevated debt level represented good investment that would result in continuous cash flows in the future.

Wu Qing, a researcher with the Development Research Center of China’s State Council, said Moody’s only focused on the Chinese government’s debt without considering its “colossal assets, a great part of which are operating assets featuring high liquidity”.

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