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Wang Yanhang: Moody’s downgrade of China’s rating not fair


By Wang Yanhang    Source: Global Times    Published: 2017-5-25


International rating agency Moody`s downgraded China`s credit rating to A1 from Aa3 on Wednesday, based on its forecast that China`s financial strength would be affected by rising debt and a slowdown in growth that would lead to more dependence on policy stimulus. It was Moody`s first downgrade for the country since 1989.  

Moody`s downgrading of China`s credit rating is very subjective and not entirely reasonable. The forecast for China`s economic future is narrow-minded, and Moody`s has overestimated the developmental difficulties China is facing. At the same time, the company has underestimated China`s ability to deliver on supply-side structural reform, expansion of demand and its determination to pursue globalization.

The real situation is this: First, China`s economy is expected to continue on a path of steady and rapid growth, which indicates Moody`s forecast is wrong. Since the beginning of this year, China`s economy has maintained steady improvement, with GDP growth of 6.9 percent in the first quarter, 0.2 percentage points higher than last year; and the major economic indicators have also been better than expected. This good start shows that the effects of China`s supply-side structural reform have emerged, coupled with the reform effect of a series of major government measures for State-owned enterprises, taxation, finance, prices and other key areas. With initiatives like the Belt and Road (B&R) and traditional business transformation beginning to bear fruit, China`s economy will maintain steady growth, and the overall economic situation is healthy.

Second, the government debt-to-GDP ratio is at a reasonable level, indicating the overall risk is under control. Moody`s opinion about growing debt levels is unreasonable. For example, by the end of 2016, China`s local government debt was 15.32 trillion yuan ($2.2 trillion), with the debt-to-GDP ratio standing at 80.5 percent. Given that there are 12.01 trillion yuan of central government bonds included in the budget management, we can see that the total Chinese government debt is 27.33 trillion yuan. In 2016, the government debt-to-GDP ratio was 36.7 percent, which was lower than the EU`s warning line of 60 percent and below the level of most major market economies and emerging economies.

Third, China is pursuing a new era of globalization. For instance, The Asian Infrastructure Investment Bank will play a significant and complementary role to promote the B&R initiative. Moody`s inference that there will be a new round of capital outflows underestimates the capital operating capacity of Chinese enterprises.

Fourth, China has been playing a more and more important role on the international stage. Graham Allison, director of the Belfer Center for Science and International Affairs at Harvard University recently issued a document saying that measured by purchasing power parity - which is the most reliable basis for international economic comparisons - China`s economy is worth $21 trillion, while the US` is only worth $18.5 trillion. This offers good evidence of China`s economic health. In recent years, China`s Fosun has acquired a 17 percent stake in Millennium BCP, Portugal`s largest listed bank, becoming its largest shareholder, and China`s HNA Group has acquired a 9.9 percent stake in Deutsche Bank, also becoming the largest single shareholder. These two cases show that China is establishing a stable, sustainable financial system. The controlling role played by the government and government-related entities, including policy banks and State-owned enterprises as mentioned by Moody`s is actually transferring to a diversified and risk-controlled system of financial patterns.

As China plays a more prominent role on the world stage, credit ratings will be extremely important. However, the rating agencies should be reliable. We hope those who are rating others` credit can reach the necessary standard as soon as possible, including Moody`s.

The author is a senior fellow with the Chongyang Institute for Financial Studies at Renmin University of China and former deputy secretary-general of the China Banking Association.

Key Words: Moody   credit rating   economy   Wang Yanhang  

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