Moody’s Downgrades China’s Rating To A1 From Aa3; Outlook Stable From Negative

On Wednesday credit agency Moody’s downgraded China’s long-term local currency and foreign currency issuer ratings to A1 from Aa3 while revising its outlook to stable from negative.

Although Moody’s admitted that “the authorities’ commitment to reform is clear” they do not believe reform efforts will have enough impact “to contain the erosion of credit strength” from the combination of rising economy-wide leverage and slower growth.

Noting that Chinese GDP growth has weakened in recent years from a peak of 10.6 percent in 2010 to 6.7 percent in 2016, Moody’s said they expect China’s growth potential to decline to close to 5 percent over the next five years based on capital stock formation slowing as investment accounts for a declining share of total expenditure while its working age population drops and the overall productivity slowdown trend is expected to continue.

Rising Economy-Wide Leverage With Slower Economic Growth

“Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole” Moody’s wrote about its rationale for the downgrade.

Moody’s expects the Chinese government’s direct debt burden to rise gradually towards 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade, similar to the 2016 debt burden for the median of A-rated sovereigns (40.7 percent) and above the median of Aa-rated sovereigns (36.7 percent).

Moody’s doesn’t believe that economic reforms enacted by Chinese authorities will be enough to offset the rise in economic and financial risk.

“Overall, we believe that the authorities’ reform efforts are likely, over time, to achieve some measure of economic rebalancing and improvement in the allocation of capital. But we think that progress will be too slow to arrest the rise in economy-wide leverage” Moody’s wrote.

Rationale For Stable Outlook

The stable outlook reflects Moody’s assessment that at the A1 rating level, risks are balanced.

While citing China’s “very large and still fast-growing economy” Moody’s noted China’s large household savings near 40 percent of incomes and China’s large foreign exchange reserves of around $3 trillion which give China’s central bank abundant firepower to preserve the stability of the currency and avoid a capital flight.

Written and Edited By:

Johnathan Schweitzer

@SchweitzFinance

schweitz31@gmail.com

 

 

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