Anticipation for US-dollar sovereign debt issue shows rating agencies’ errors

The Chinese Ministry of Finance (MOF) has revealed plans for the sale of $2 billion in US dollar-denominated sovereign bonds in Hong Kong, the first issue of its kind in more than a decade.

The government has yet to seek a rating for the issue from major credit-rating agencies such as US-based Moody’s Investors Service, but analysts predict the sovereign deal will be massively oversubscribed due to soaring demand for Chinese issues of US dollardenominated bonds. This may signal a counterblow by China against the rating agencies, whose actions have been ridiculed.

Although Moody’s in May cut China’s sovereign credit rating to A1 from Aa3, it’s quite possible that the nation’s upcoming bond issue will be priced at almost the same level as those of countries with Aa3 ratings. If that turns out to be the case, it will add to evidence that Moody’s has underestimated China’s sovereign creditworthiness.

In September, Standard & Poor’s followed Moody’s move by slashing China’s credit rating from AA- to A+, citing concerns over soaring debt levels and highlighting challenges faced by Chinese policymakers as they cope with slowing economic growth.

The agencies’ pessimistic views of China’s future are subjective. The objective reality is: China’s economy continued steady expansion in the third quarter with GDP up 6.8 percent year-on-year, still comfortably above the government’s target.

The IMF raised its growth forecast for China in 2017 earlier this month, citing the stronger-than-expected outturn underpinned by supply-side reforms.

The credit rating agencies have very superficial knowledge of China’s model of economic development. The country has a strong ability to insulate itself from economic shocks through continued efforts to pursue broad reforms, notably supplyside reforms.

Some foreign credit-rating firms try to understand China using Western economic theories, which failed to explain China’s rapid economic growth in recent decades. That is why the decisions by Standard & Poor’s and Moody’s to slash China’s credit ratings have had little impact on global investor sentiment.

China’s upcoming return to the global bond market should prompt Western credit-rating firms to develop a better understanding of China. The country isn’t raising US dollars because it needs the money. China’s foreign exchange reserves hit an 11-month high at the end of September, suggesting that the central bank holds ample US dollar-denominated assets.

The MOF said Tuesday that the issue is an important measure to promote further opening-up of China’s financial sector. China’s progress toward an open economy will be definite. The country will be soon an important player in the global bond markets, and the engagement and the collision between China and Western credit-rating firms is just a beginning.