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China’s credit-rating outlook was lowered to negative from stable at Moody’s Investors Service, which highlighted the country’s surging debt burden and questioned the government’s ability to implement reforms just days before leaders gather to approve a five-year road map for the economy.
The government’s financial strength may come under pressure if it takes on liabilities from troubled state-owned companies, while capital outflows have limited policy makers’ scope to stimulate the weakest economy in a quarter century, the ratings company said in a statement on Wednesday. State intervention in equity and foreign-exchange markets has heightened uncertainty about the leadership’s commitment to reforms, Moody’s said.
While market reaction to the outlook cut was muted on Wednesday, it highlights growing concern among global investors that the ruling Communist Party will struggle to overhaul Asia’s largest economy at a time when debt levels have climbed to an unprecedented 247 percent of gross domestic product. Chinese leaders will begin nearly two weeks of policy meetings on Saturday to map out how to tackle the nation’s economic challenges and meet the government’s goal of doubling per-capita income by 2020.
“The government’s ability to absorb shocks has diminished and we want to signal this in the negative outlook,” Marie Diron, a senior vice president at Moody’s, said in an interview on Bloomberg Television. Authorities “have stepped backward in their reform steps and so that is creating some uncertainty.”
Market Concerns
The concerns flagged by Moody’s have already manifested themselves in markets in recent months. The cost to insure Chinese government bonds against default for five years has climbed about 38 basis points, or 0.38 percentage point, since mid-November to 134 basis points. That’s approaching the 151 basis-point cost for credit-default swaps on Thailand, which has a Moody’s rating four levels below that of China.
Chinese stocks, meanwhile, have dropped 23 percent this year and the yuan has slipped 0.8 percent in onshore trading against the U.S. dollar. In Wednesday trading, credit-default swaps were little changed, while the Shanghai Composite Index climbed 1.2 percent and the yuan rose less than 0.1 percent.
“The ratings haven’t been changed so I expect market reaction to initially be muted,” said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia. “There’s no new information here, just recognition of the issues we’ve known for years.”
While Moody’s cut its outlook, the ratings company also highlighted its rationale for affirming China’s long-term credit rating of Aa3, the fourth-highest investment grade. The large size of China’s economy contributes to its credit strength, while growth is still higher there than most of its peers. The country also has a moderate level of low-cost government debt, high domestic savings and substantial foreign-exchange reserves, Moody’s said.
The ratings company said it may downgrade China’s rating if the pace of reforms needed to support growth slows, while it would revise the outlook to stable if the nation reduces its liabilities by restructuring state-owned enterprises.
China Credit Outlook Cut to Negative From Stable by Moody's - Bloomberg Business
The government’s financial strength may come under pressure if it takes on liabilities from troubled state-owned companies, while capital outflows have limited policy makers’ scope to stimulate the weakest economy in a quarter century, the ratings company said in a statement on Wednesday. State intervention in equity and foreign-exchange markets has heightened uncertainty about the leadership’s commitment to reforms, Moody’s said.
While market reaction to the outlook cut was muted on Wednesday, it highlights growing concern among global investors that the ruling Communist Party will struggle to overhaul Asia’s largest economy at a time when debt levels have climbed to an unprecedented 247 percent of gross domestic product. Chinese leaders will begin nearly two weeks of policy meetings on Saturday to map out how to tackle the nation’s economic challenges and meet the government’s goal of doubling per-capita income by 2020.
“The government’s ability to absorb shocks has diminished and we want to signal this in the negative outlook,” Marie Diron, a senior vice president at Moody’s, said in an interview on Bloomberg Television. Authorities “have stepped backward in their reform steps and so that is creating some uncertainty.”
Market Concerns
The concerns flagged by Moody’s have already manifested themselves in markets in recent months. The cost to insure Chinese government bonds against default for five years has climbed about 38 basis points, or 0.38 percentage point, since mid-November to 134 basis points. That’s approaching the 151 basis-point cost for credit-default swaps on Thailand, which has a Moody’s rating four levels below that of China.
Chinese stocks, meanwhile, have dropped 23 percent this year and the yuan has slipped 0.8 percent in onshore trading against the U.S. dollar. In Wednesday trading, credit-default swaps were little changed, while the Shanghai Composite Index climbed 1.2 percent and the yuan rose less than 0.1 percent.
“The ratings haven’t been changed so I expect market reaction to initially be muted,” said Andy Ji, a Singapore-based foreign-exchange strategist and economist at Commonwealth Bank of Australia. “There’s no new information here, just recognition of the issues we’ve known for years.”
While Moody’s cut its outlook, the ratings company also highlighted its rationale for affirming China’s long-term credit rating of Aa3, the fourth-highest investment grade. The large size of China’s economy contributes to its credit strength, while growth is still higher there than most of its peers. The country also has a moderate level of low-cost government debt, high domestic savings and substantial foreign-exchange reserves, Moody’s said.
The ratings company said it may downgrade China’s rating if the pace of reforms needed to support growth slows, while it would revise the outlook to stable if the nation reduces its liabilities by restructuring state-owned enterprises.
China Credit Outlook Cut to Negative From Stable by Moody's - Bloomberg Business
