Moody’s Investors Service Wednesday lowered the outlook on China’s credit rating from stable to negative, citing a weakening of fiscal metrics and a continuing fall in foreign exchange reserves.
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With regards to the foreign exchange reserves of the world’s second largest economy, Moody’s said this represented external vulnerability.
Ratings agency Moody’s today placed China’s sovereign rating on watch negative, suggesting a one-in-three chance that the group may downgrade the nation’s Aa3 rating in the months ahead. Government debt jumped to 40.6 percent of gross domestic product (GDP) at the end of 2015 from 32.5 percent in 2012, Moody’s estimated, forecasting it would rise to 43.0 percent by next year as policymakers increased government spending and cut taxes to support the economy. State intervention in equity and foreign-exchange markets has heightened uncertainty about the leadership’s commitment to reforms, Moody’s said.
The first driver of the negative outlook on China’s rating relates to the government’s fiscal strength which has weakened and which we expect to diminish further, albeit from very high levels. But the official news agency Xinhua carried a bylined commentary denouncing Moody’s for “short-sightedness” and questioning Western ratings agencies’ “credibility, authority and significance”. Wednesday’s level is fractionally higher than that of late Monday afternoon’s 6.5585 following the PBOC’s decision to increase yuan liquidity by lowering the amount of deposits banks must hold in reserve by 0.5 percentage point.
“The 50bp cut to the reserve requirement ratio (RJR) for Chinese banks on Tuesday, together with record loan growth in January, could point to an increasing likelihood that the authorities are shifting policy to enable more credit-fuelled growth”, Fitch analysts wrote. These buffers include a relatively moderate level of government debt, which is financed at low cost, and high domestic savings and still substantial foreign exchange reserves.
“China has been moving toward some of the recommended measures that the ratings agencies have put forward, but the pace may not be what they expect”, said Tommy Ong, a managing director for treasury and markets at DBS Hong Kong Ltd. “It’s a long-term process, no quick fix”.
S&P, which has a China rating equivalent to that of Moody’s, declined to comment on Wednesday.
The Chinese economy is now growing at its lowest rate in 25 years due to the slowing manufacturing sector and reduced demand for commodities. Both agencies have a stable outlook for China in the long-term. However, their existence and increase in size reflect economic imbalances.
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Moody’s said it was concerned over China’s incomplete implementation of much needed reforms. Debt will reach 283% of GDP, according to the median estimate of eight economists. “Nevertheless, concerns that China will devalue its currency against the United States dollar remain a key global uncertainty”.
