Why lowered credit rating won’t affect China
What will be the impact of Standard & Poor’s decision to lower China’s sovereign credit rating? I don’t believe there will be any serious effect.
The sovereign credit rating is a measure of a state’s fiscal revenue and the overall level of expenditure. In any economy, if the financial situation often fails to make ends meet, the healthy growth of other areas of the economy will be affected. Then, as various economic indicators show poor readings, the country’s sovereign credit rating will be lowered.
So why are there ratings? When cross-border investment is conducted, the credit rating system provides a commercial evaluation to help those unfamiliar with the situation in the destination market in carrying out their trading activities. Sovereign credit ratings are very important for financial institutions traded on the international currency secondary market, or interbank market, which is the starting point for their subsequent financial capital transactions.
Investment trade and commodity transactions are different. In long-term trade practices, the trade partners generally have a long-term, partner-type fiduciary relationship. That is, if one partner pulls out, the other partners are likely to bear all the remaining costs. But investment trade is quite different, because in the currency secondary market, a transaction can be completed in an instant with no need for a partner-type relationship. In the primary and secondary capital markets, the relationship between the institutional investors is far more complex than with partnerships. This is why a third-party independent rating system is an important element.
This time, the three major global credit rating agencies appeared to hold negative views about China’s credit. When S&P lowered China’s sovereign credit rating from AA- to A+, some wondered how big the influence on China would be. So far, there seems to have been little impact. The AA- and A+ levels are not that far apart, but more importantly, the three rating companies have the same problems in terms of sampling information channels for judging China’s sovereign credit rating.
China’s GDP growth has exceeded expectations this year, and for three consecutive quarters the figure has been more than 6.7 percent. In accordance with the principle that three quarters of growth show an economy is stable, we can infer the Chinese economy has come out of its slowing period. At the same time, China’s growth in recent years has been three times more than that of the US, and almost all China’s macroeconomic variables and data for consumption, investment, imports and exports, inventory and employment have shown that the supply-side structural adjustment policy has been effective, indicating that the future revenue situation will be improved.
I think the three major rating companies downgraded China’s rating for two reasons. First, investment in August this year decreased. Second, the debt figures for local governments are high. However, there is a big difference between the local government debt in China and in Western countries. The debts of a number of local government investment companies and financing companies are included in the debts of local governments in China, even though it is understood that these investment and financing companies operate as enterprises, and that they are not entirely owned by the local governments. Given this fundamental difference, how can correct results come from the same method of producing ratings?
Therefore, I think the influence of the lowered credit ratings from the three global giants will be small, even if there is some small short-term impact in the money market.
We might wonder what the effect would be if China’s rating agency, Dagong Global Credit Rating, lowered the credit level of the US. How would the market react to that? Small countries may feel a big impact, but larger ones will be unaffected.