Moody’s Downbeat On China

One of the major credit ratings agencies, Moody’s, has sounded a note of caution about the outlook for Chinese sovereign debt, changing its assessment from “stable” to “negative”. For the time being, the nation’s credit status remains unchanged at Aa3, placing it in the second tier of investment grade bonds (high quality; very low credit risk). The negative outlook usually means that the credit rating agency believes that the rating could be downgraded within the next two years.

Moody’s cautioned that a downgrade could be foreseen unless economic reforms were undertaken, given that China’s fiscal strength was undergoing a decline as the nation deals with weak global demand, a slowing economy at home and the relative strength of the Yuan (although some still argue that it is still significantly below its true value). The ratings agency clearly doesn’t think that enough progress is being made on reforms intended to rebalance the economy by bolstering domestic demand and becoming less dependent on exports.

In an explanatory note, Moody’s suggested: “Without credible and efficient reforms, China’s GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavourable. Government debt would increase more sharply than we currently expect.”

The sovereign rating remains unchanged since the necessary reforms might be implemented before the nation’s current credit rating is effected; a negative outlook is a longer-term forecast and therefore subject to changing factors over time.

The Chinese hosted the recent G20 meeting of finance ministers in Shanghai. Lou Jiwei, the Chinese finance minister, assured his guests that China is well placed to weather the current storms it is facing. Much has been made of the fact that the economy has expanded at its slowest rate for 25 years. However, it continues to expand when other economies (notably the Eurozone and Japan) tread water or contract and, if, the figures are to be believed, a rate of expansion of 6.9% is still astounding by any measure.