Ratings fail to portray full picture of China’s economy
Last week, Standard & Poor’s rating agency lowered China’s sovereign credit rating by one notch to A+ from AA- and revised its outlook to stable from negative. This means S&P’s rating is in line with assessments from Moody’s and Fitch, which cut their sovereign credit ratings for China in May and 2013, respectively.
A sovereign credit rating was originally a very professional financial assessment, offering cross-border investment and financing guidelines for other institutions. But in the Internet era, the impact of such a rating has been amplified by online media. In particular, for a country like China that attracts global attention, the sovereign credit rating is considered by some as an indicator of whether China’s economic performance will be “good” or “bad.”
First, the big three credit rating agencies actually use US market conditions as a template to develop rating parameters. Since China differs a lot from the US in terms of economic and market conditions, applying these parameters to China may result in lower accuracy. It is generally believed that S&P’s downgrade of China’s rating and its stable outlook for the country’s long-term economic trend are unlikely to have a significant impact on the market. This limited impact is actually a reflection of the agency’s discounted accuracy.
Nevertheless, when it comes to public opinion, Western rating agencies’ reductions of China’s sovereign credit ratings are often used as a tactic to attract public attention.
Generally speaking, Western investment institutions have been inaccurate in forecasting the performance of the Chinese economy over the years, which shows that the Western ratings of China are wrong. For a long time, the Western mainstream media has given a pessimistic picture of China’s economy, and that bias has had a profound impact on the Western perception of China.
While ratings agencies are not ordinary opinion makers, they are part of Western culture, which can’t throw off Western perceptions and logic.
China’s economy including finance is not exactly the same as the West. Therefore, although Western rating agencies and other professional observers provide seemingly objective thirdparty views about China, it is a superficial objectivity and does not touch on the most profound “rules” about China. Drawing an analogy, a Western ruler can measure whether China is “fat” or “slim,” but it cannot accurately evaluate the overall health based on the result.
According to some Western predictions, the Chinese economy should have “collapsed” several times, and we should have borne the brunt of an economic hard landing and experienced a “color revolution,” but such predictions failed again and again.
A sovereign credit rating is mainly aimed at measuring the debt default risk of a country. China has been unprecedentedly stringent in the control and governance of its debt in recent years, and its ability to adjust leverage is unmatched in the world. Since the beginning of this year, China’s foreign exchange reserves have increased, with the yuan strengthening again, pointing to the improved trend in financial risk control.
With various bubbles squeezed out of the Chinese economy in recent years, the country’s economic development is bound to take off again. Chinese society is full of expectations that new growth potential will be released after the 19th National Congress of the Communist Party of China, which is scheduled to be held on October 18 in Beijing.
In exchanges with the Western elite, Chinese people may feel an initial novelty in hearing their perceptions of China. But slowly, they see the limitations of Western understanding of China and the stubbornness in it.
The best way to understand China is from an integrated Chinese-Western perspective, rather than one or the other.
Whether China agrees or not, the S&P rating is out there, representing the Western understanding of China. Professionals will still refer to it, but the Chinese economy has not fit into the framework set by the West in recent years. Objectively speaking, the Chinese economy is special in a way that Western observers cannot perceive.
According to some Western predictions, the Chinese economy should have “collapsed” several times, and we should have borne the brunt of an economic hard landing and experienced a “color revolution,” but such predictions failed again and again.