China raps Moody’s ratings

Credit agency used ‘ inappropriate methodology’: MOF

China said on Wednesday international credit rating agency Moody’s applied “inappropriate methodology” in downgrading China’s credit rating, saying the firm had overestimated the difficulties faced by the Chinese economy and underestimated the country’s ability to enhance supply- side reforms.

The Ministry of Finance ( MOF)’ s reaction comes after Moody’s Investors Service on Wednesday downgraded China’s credit rating for the first time since 1989 out of concerns that the Chinese government’s use of fiscal measures to spur economic growth would lead to rising debt.

“China’s economy started off well this year, which shows that the reforms are working,” the ministry said in a statement on its website.

Moody’s downgraded China’s long- term local currency and foreign currency issuer ratings one notch to A1 from Aa3 and changed its outlook from negative to stable. Risks are considered “balanced” at the A1 level.

The downgrade reflects Moody’s perception that China’s finances would weaken over the coming years, with economy- wide debt continuing to rise as potential growth slows, the firm said.

Moody’s on Wednesday also

downgraded the ratings of 26 Chinese government- related non- financial corporate and infrastructure issuers and rated subsidiaries by one notch. It also downgraded the ratings of several domestic banks, including the Agricultural Bank of China Limited’s long- term deposit rating from A1 to A2.

Moody’s noted that the importance Chinese authorities have attached to maintaining robust growth would result in sustained policy stimulus, and such government spending would contribute to rising debt across the economy.

“We expect the government’s direct debt burden to rise gradually toward 40 percent of GDP by 2018 and closer to 45 percent by the end of the decade,” Moody’s noted.

But the ministry said China’s government bonds reached 27.33 trillion yuan ($ 3.97 trillion) at the end of 2016, or about 37 percent of the country’s GDP. The proportion is much lower than the 60 percent picket line delimited by the EU, the ministry said.

Liu Xuezhi, a senior analyst at the Bank of Communications, said that the proportion of government bonds to GDP has been continuously dropping since peaking in 2013, largely due to the government efforts to manage debt.

“I think Moody’s reasons are debatable,” he said.

Zheng Xinye, associate dean of the School of Economics at the Renmin University of China, also told the Global Times on Wednesday that the government has taken effective measures, such as bond swaps and perfecting the issuance and management system of local government debt, to rein in bond risks.

Liu added that China’s fiscal revenue has been rising since 2009. “Besides, the Chinese government has income channels which other countries don’t, such as land transfer money and State assets. Therefore, I don’t think China would be facing serious financial pressure, at least not in the next few years,” he told the Global Times on Wednesday.

Zheng also said that the government wouldn’t need to use fiscal measures to stimulate growth, as the effects of supply- side reforms would sustain the economy’s momentum.

Slower growth?

Moody’s also forecast that China’s growth will slow to 5 percent in five years, because of a smaller workingage population and continuing production slowdown.

The Chinese economy expanded by 6.7 percent in 2016 compared with a peak of 10.6 percent in 2010. But the country’s economy has picked up since the second half of 2016, with GDP growth reaching 6.9 percent in the first quarter of 2017.

Liu said the chances are very slim for China’s economy to slip to 5 per- cent in the next five years. “I believe China’s GDP growth will remain above 6.5 percent at the end of 2020, as China has abundant room for policy adjustments to support economic growth,” Liu said.

Zheng said the economy has not shown any signs of sliding.

Overseas investor confidence

Liu said that the Moody’s downgrade would hurt overseas investor confidence in the Chinese market or collaborations with domestic companies.

“It would also make it more difficult for domestic companies to seek financing in overseas markets,” he noted.

But Liu said domestic financial markets would not be affected as much, because they’re not entirely open.

On Wednesday, the Shanghai stock market gained 0.07 percent, while the Shenzhen market rose by half a percent.

Liu Dongliang, a senior analyst at China Merchants Bank, told the Global Times on Wednesday that Moody’s decision may slightly influence Chinese offshore corporate bonds, considering that most bond holders are Chinese investors who are familiar with the credit status of domestic companies.