Moody’s Investors Service on May 24 downgraded China’s long-term local currency and foreign currency issuer ratings from Aa3 to A1, but changed the outlook from “negative” to “stable.” Experts said the move showed the rater’s lack of knowledge about China’s policy arrangement for government debt.
Last March, the company lowered its outlook on China’s sovereign credit rating from “stable” to “negative,” a move then-Finance Minister Lou Jiwei dismissed, saying, “We don’t much care about the ratings.”
Last year, China’s debt-to-GDP ratio stood at around 36.7 percent, far below the EU’s warning line at 60 percent and lower than the level of major market economies and emerging economies. The risks were generally controllable.
According to China’s Budget Law, the only legal way to raise funds for local governments is by issuing government bonds within a quota. Approved by the National People’s Congress, this year’s quota for added local government bonds was 1.63 trillion RMB ($240 billion), only slightly higher than last year’s 1.18 trillion RMB ($172 billion), indicating that there won’t be big changes in the debt-to-GDP ratio this year.
For that reason, experts have disregarded Moody’s prediction that the Chinese government’s direct debt burden will rise to 40 percent of its GDP in 2018, and edge closer to 45 percent in 2022.
Moody’s also turned a blind eye to advances in the country’s supply-side structural reform. The agency stated that deleveraging measures didn’t perform as expected, but didn’t disclose specific figures for the core indicators. Therefore, the rationale behind the analysis should be reconsidered, said Chen Daidi, general manager of China Bond Rating Co.
The Chinese economy maintains stable and positive momentum in 2017, with the first quarter GDP up to 6.9 percent, further accelerating the growth rate by 0.2 percent year on year. Moody’s rating was far too simplistic to reflect the real conditions of China’s economic development and government credit, according to Zheng Chunrong of the Shanghai University of Finance and Economics.
Chinese government debts are largely allocated to infrastructure construction, which is fundamentally different from other world governments that use debts for consumptive purposes, Zheng added.