China has tried to brush aside a rare cut to its credit rating by Moody’s Investors Service as misinformed, but its reaction highlights its sensitivity to how it is being viewed just as it seeks more foreign capital in its equity and bond markets. The downgrade offered no new revelations on China’s debt problems but effectively challenged Beijing’s economic outlook and raised questions about the impact of its highly-touted reforms, adding to concerns for foreign investors, analysts say.
State media did not report Moody’s decision on Wednesday to downgrade China’s sovereign rating until the finance ministry issued a statement hours later saying the rating agency’s analysis overestimated risks and was based on “inappropriate methodology”. The demotion by one notch to A1 was Moody’s first for China in nearly 30 years, and agency officials said on Friday that another cut is possible down the road unless the country gets its ballooning credit in check.
As China pushes for inclusion in one of MSCI Inc’s major global stock indices at a review next month and plans to open its bond market further to foreign investors this year, outside assessments and calls for transparency will only increase. And if Moody’s and Beijing view the same debt differently, it may partly reflect difficulties that outsiders face in getting access to information needed to assess China’s risks.
“The level of access (in China) is in contrast to other countries that badly need funding,” said an analyst at another ratings agency, declining to be identified due to the sensitivity of the issue. “Funding is not really an issue for China, so the level of meetings at the Ministry of Finance or the People’s Bank of China varies. Access to officials is a function of the relationships the ratings agencies have built up.”
China’s Ministry of Finance and the People’s Bank of China did not immediately respond to faxed requests for comment. Just this month the Financial Stability Board (FSB), the financial risk monitoring agency of the Group of 20 (G20) economies, criticized Beijing for not providing key financial data, leading to the delay in a report on the financial risks the world faces from shadow banking.
With most of its debt needs funded from a large domestic savings pool, China for now can afford to play down the significance of international ratings.
And its financial markets seemed to have shrugged off the downgrade, though some traders suspect there has been a bit of state support.
On Thursday, the yuan leaped to a two-month high against the U.S. dollar on Thursday, supported by major state-owned banks in what some traders said was a show of strength after the Moody’s downgrade. It rose further on Friday. Stocks also rose sharply on Thursday, as the blue-chip CSI300 index posted its best day in more than nine months, with some traders hinting that state-directed buying might have helped prop up the market.
TILL DEBT DO US PART?
Explaining its reasons for the downgrade, Moody’s cited expectations that China’s debt burden would increase and that authorities would continue to rely on stimulus to meet official growth targets. Beijing has acknowledged the debt problem, but says the risks are controllable. For now, it is unlikely to impact foreign appetite for onshore debt because investors have already priced in a growing debt burden, said Jean-Charles Sambor, deputy head of emerging markets fixed income at BNP Paribas Investment Partners.
“Would we like a better understanding of the structure of these debts? Of course,” Sambor said. “That’s due to the complexity of the various layers of debt which includes corporate, municipal, broader public debt, as well as off-balance sheet items and shadow banking.” “The structure of the debt is very complicated and sometimes there is overlap and none of the estimates are perfect.”
Lower credit ratings could make it more expensive for Chinese state firms to raise overseas debt used to fund domestic investment, and can limit the ability of some foreign funds to buy Chinese assets for their portfolios.
“I don’t think (Moody’s) understands the actual situation in China,” said Xu Hongcai, deputy chief economist at China Center for International Economic Exchanges (CCIEE), a prominent think-tank in Beijing. “China’s economic growth prospects this year are better than last year. The economy is stabilizing and improving. (Moody’s) is worried about local government debt, but they don’t need to worry about that.”