China’s reforms not enough to arrest mounting debt: Moody’s


FILE PHOTO: A labourer has his dinner under his shed at a construction site of a residential complex in Hefei, Anhui province, August 1, 2012. REUTERS/Stringer/File Photo

By Yawen Chen and Ryan Woo | BEIJING Fri May 26, 2017 | 7:16am EDT

China’s structural reforms will slow the pace of its debt build-up but will not be enough to arrest it, and another credit rating cut for the country is possible down the road unless it gets its ballooning credit in check, officials at Moody’s said.

The comments came two days after Moody’s downgraded China’s sovereign ratings by one notch to A1, saying it expects the financial strength of the world’s second-largest economy to erode in coming years as growth slows and debt continues to mount.

In announcing the downgrade, Moody’s Investors Service also changed its outlook on China from “negative” to “stable”, suggesting no further ratings changes for some time.

China has strongly criticized the downgrade, asserting it was based on “inappropriate methodology”, exaggerating difficulties facing the economy and underestimating the government’s reform efforts.

In response, senior Moody’s official Marie Diron said on Friday that the ratings agency has been encouraged by the “vast reform agenda” undertaken by the Chinese authorities to contain risks from the rapid rise in debt.

However, while Moody’s believes the reforms may slow the pace at which debt is rising, they will not be enough to arrest the trend and levels will not drop dramatically, Diron said.

Diron said China’s economic recovery since late last year was mainly thanks to policy stimulus, and expects Beijing will continue to rely on pump-priming to meet its official economic growth targets, adding to the debt overhang.

WAITING FOR IMPLEMENTATION

Moody’s also is waiting to see how some of the announced measures, such as reining in local government finances, are actually implemented, Diron, associate managing director of Moody’s Sovereign Risk Group, told reporters in a webcast.

China may no longer get an A1 rating if there are signs that debt is growing at a pace that exceeds Moody’s expectations, Li Xiujun, vice president of credit strategy and standards at the ratings agency, said in the same webcast

“If in the future China’s structural reforms can prevent its leverage from rising more effectively without increasing risks in the banking and shadow banking sector, then it will have a positive impact on China’s rating,” Li said.

But Li added: “If there are signs that China’s debt will keep rising and the rate of growth is beyond our expectations, leading to serious capital misallocation, then it will continue to weigh on economic growth in the medium term and impact the sovereign rating negatively.”

“China may no longer suit the requirement of A1 rating.”

Li did not give a specific target for debt levels nor a timeframe for further assessments.

Moody’s expects China’s growth to slow to around 5 percent in coming years, from 6.7 percent last year, compounding the difficulty of reducing debt. But Diron said the economy will remain robust, and the likelihood of a hard landing is slim.

After Moody’s downgrade, its rating for China is on the same level as that on Fitch Ratings, with Standard & Poor’s still one notch above, with a negative outlook.

On Friday, Fitch said it is maintaining its A+ rating. Andrew Fennel, its direct of sovereign ratings, noted China’s “strong macroeconomic track record”, but said that its growth “has been accompanied by a build-up of imbalances and vulnerabilities that poses risks to its basic economic and financial stability”.

STIMULUS SPREE

Government-led stimulus has been a major driver of China’s economic growth over recent years, but has also been accompanied by runaway credit growth that has created a mountain of debt – now at nearly 300 percent of gross domestic product (GDP).

Some analysts are more worried about the speed at which the debt has accumulated than its absolute level, noting much of the debt and the banking system is controlled by the central government.

UBS estimates that government debt, including explicit and quasi-government debt, rose to 68 percent of GDP in 2016 from 62 percent in 2015, while corporate debt climbed to 164 percent of GDP in 2016 from 153 percent the previous year.

A growing number of economists believe that a massive bank bailout may be inevitable in China as bad loans mount. Last September, the Bank for International Settlements (BIS) warned that excessive credit growth in China signaled an increasing risk of a banking crisis within three years.

IS BEIJING MAKING PROGRESS?

The Moody’s downgrade was seen as largely symbolic because China has relatively little foreign debt and local markets are influenced more by domestic factors, with many companies enjoying stronger credit ratings from home-grown agencies than they would in the West.

Still, the rating demotion highlighted investor worries over whether China has the will and ability to contain rising risks stemming from years of credit-fueled stimulus, without triggering financial shocks or dampening economic growth.

China has vowed to lower debt levels by rolling out measures such as debt-to-equity swaps, reforming state-owned enterprises (SOEs) and reducing excess industrial capacity.

In recent months, regulators have issued a flurry of measures to clamp down on the shadow banking sector while the central bank has gingerly raised short-term interest rates.

But moves so far have been cautious, especially heading into a key political leadership reshuffle later this year.

The autumn’s Communist Party Congress is President Xi Jinping’s most important event of the year, where a new generation of up and coming leaders will be ushered into the Standing Committee, China’s elite ruling inner core.

But party congresses are always tricky affairs, as different power bases compete for influence, so the government will be keen to ensure there are no distractions like financial or economic problems or diplomatic confrontations.

(Additional reporting by Ben Blanchard and Elias Glenn; Editing by Kim Coghill and Richard Borsuk)

Source: Reuters “China’s reforms not enough to arrest mounting debt: Moody’s”

Note: This is Reuters’ report I post here for readers’ information. It does not mean that I agree or disagree with the report’ views.

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14 Comments on “China’s reforms not enough to arrest mounting debt: Moody’s”

  1. Joseph says:

    Ok, so because of Moody’s rating downgrade, China would not get Western investment anymore. So what? Western investment was never significant in China anyway. The primary investors in China is actually Chinese overseas from South East Asia, not even Chinese Overseas from the West. And they don’t read dodgy Moody as most of them could not read English anyway. While a single Chinese Overseas investment was rarely bigger than single Western investment, the number of investors far surpassed Western as a whole. That’s why China does not even need America, or Australia and UK on its OBOR initiative, only South East Asia countries as a core. Dodgy Moody was always controversial and full of conflict of interest anyway, and Moody was required to pay compensation or to make outside court settlement. And the most crowning blunder achievement was the 2008 Global Financial Crisis, which was blamed on dodgy Moody’s false rating downgrade which inflated the American house price. Other victims include American allies of Australia, Canada and Japan in the 1980s-90s. All because these ‘allies’ performed better than the American. Not too ago, one of dodgy Moody’s fellow rating scammer, Standard and Poor was clashing with Indonesian Jokowi government, foor giving a ‘Poor’ rating, literally, only because the newly-elected administration would consider Chinese and Singaporean investments more than the Western investment. And two years on, even without Western investment and rating scammers, Indonesian economy manages just fine, even better than ever. So let Western investors follow their rating scammers, while we tend our own economic affairs in peace.

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    • Simon says:

      The Chinese bankrupt the Roman empire through it silk trade. Throughout history Westerners are very poor in financial matters wasted on wars, decadents and corruptions. None of that has changed. The Chinese are now bankrupting the West once again.
      The average Westerners don’t have much money in saving, many are in debt. The best they can hope for is their home but the value are grossly inflated. They rely completely on the government taking care of their financial mess which their government do by borrowing overseas. Unlike the average Chinese most of whome are cash rich because they work hard and save for the future and don’t rely on government handout therefore its government can afford the financial means to build the country and invest/lend money abroad.

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      • Joseph says:

        There was never a record of contact between China and Roman empire, simply because Roman empire was too insignificant to China. Modern people, including Jackie Chan, often like to entertain the idea of contact somehow because they think Roman empire was a ‘great’ empire, but there was really nothing great about the Roman to the Chinese. Western historians often emphasize Roman greatness in conquering Carthage, Europe and Egypt, but if we look at the map of the Roman empire, it was really tiny compared to any Chinese empires. Instead, the Chinese made contact to the Parthian empire, the ancient Persian empire and the so-called mortal enemy of the Roman. The Silk Road ended in the Parthian empire in the West, but Chinese goods traveled further West to the Roman empire by Parthian traders. The Roman often complained that the Parthian charged cutthroat price for Far-East luxury, namely silk that they were very fond of, but the failed to make contact with the Chinese. There were even story about the fabled ‘Lost Legion’ sent to the east to find the elusive Hun/Han empire to open trade. They loved to entertain the idea that this ‘Lost Legion’ had somehow reached China and settled there, but the Lost Legion was most likely got really lost in Siberia. The Hun finally came to Rome in the form of the marauding Xiongnu whom they called the Hun anyway, and unlike the Chinese who fought off the Xiongnu, the Roman begged for mercy and paid huge ransom for survival. So if there’s claim that the Chinese bankrupted the Roman empire, it was not true at all. It was the Parthian all along, then the Xiongnu that the Roman called the Hun, mistaken for the Han. In the end, the Roman was actually a little empire not fit to survive. The Roman could not even be on the same level of the Parthian empire, let alone with the Great Han Empire. Dream on Roman.

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        • Simon says:

          There is contact between China and Rome. Emperor Marcus Aurelius sent an ambassador to Han Dynasty China. China’s trade with Rome was massive in terms of silk were the Chinese selling them more than gold in weight. The Roman emperor and the nobles all wore Chinese silk. The Western Han empire was actually about the same size as the Roman at its peak. There was no direct contact between the two militaries because Persia stands in between.
          You don’t need direct contact for trade to flourish between nations because traders rather than the military did the tradings.

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        • Steve says:

          The Romans were both imperialist and colonisers. Their militaristic control was the most evil, at par with the Japanese savages or worst than ISIS today. They were destined to collapse.

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      • johnleecan says:

        The average and the poor in ANY country always far outnumber the rich including China or ANY country with Chinese population. So your premise that most average Chinese are cash rich isn’t true. Your thinking and comment might lead to endanger many ethnic Chinese living in other countries to be subject to robbery and theft or other crimes because many of the local people will usually think “this is my country, why are they rich and we are poor” mentality. Even those ethnic Chinese who are locally born and are citizens of that country will be subject to this treatment.

        I have seen many poor Chinese and this is a fact. Most locals only pay attention to the rich and they think all Chinese are rich. A comment from a Chinese will surely make them think they are right in thinking many Chinese are rich.

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        • Steve says:

          True – except for western countries where Chinese immigrants including second and third generations are on average considered fairly rich.

          Like

  2. Steve says:

    The subprime mortgage crisis in the US occurred when corrupt banks used home mortgages to underwrite mortgage backed securities, consequently, when the housing market collapsed, the scoundrel banks went bankrupt. This will not happen in China simply because the Chinese government will never allow the banks to corrupt as in the US.

    China’s central bank has already urged banks to strengthen mortgage risk management to stem the flow of credit to the real estate market. The Chinese banks have hiked up interest rates on housing loans for 1st and 2nd homebuyers and removed discounts for first home buyers. As a consequence higher down payments for first home buyers increased to 30%, second home buyers to 60% and for high end properties to 80%. I believe this will protect the equity market for homeowners.

    According to wikipedia the highest external debt as from 31 December 2016;-

    USA — 18.2 trillion $$$
    UK — 7.5 trillion $$$
    France — 5.1 trillion $$$
    Germany 5.0 trillion $$$
    in 7th spot Japan 3.6 trillion $$$.

    China’s external debt is only 1.4 trillion $$$. Singapore — 1.3 trillion $$$ (considering a very small island population).

    China owns of US treasury debt compared to it’s external debt of only 1.4 trillion $$$.

    Clearly, China’s economic reform is stable. It’s the USA, UK, France and Germany that should be concerned that a similar subprime situation may collapse the EU economy.

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  3. Simon says:

    China has no external debts and the advantage of having a state control economy is any debt accumulated at home can be wiped out when it suite the government. The stock market crash in HK and the $80 billion debt was immediately wiped off by China and it came right after the handover of HK to Chinese control. HK was lucky it had China.

    Like

  4. alking1957 says:

    The rating agencies are crooks anyway. During the US housing bubble in 2004-2007 they gave Safe ratngs to CDOs that they know are toxic, to help banks like Goldman Sachs to sell them, causing the Great Financial Crisis. They did not get punished, and are still around. They still have US bonds rated AAA when the US has trillions of external debt, and their Congress have no ability to reduce the debt whatsoever!

    Like

    • Simon says:

      The world including America owes China money. China owns many major foreign companies. China frequently cancels debt owe by poorer countries and did so because it can afford to. When it comes to money matters the Chinese are the most astute anywhere in the world.

      Like

  5. Fre Okin says:

    Serious danger of China repeating US 2008 Financial Meltdown. Excess housing prices, stock market biggest culprit. Capital flight control, housing price curb is a must to prevent worsening. All these abnormal wealth gains are temporary, fake wealth. China is not immune to human greed. This movie keeps repeating every couple of decade. People have short memory!

    Only if overseas investment become less attractive, then less capital flight. Maybe with US overpriced stock market and cooling economy probably just around corner, less incentive for Chinese money to leave the country.

    China somewhat like Japan, massive Internal Debt, but if the investments only produce ‘ghost cities’,factories with no customers, it serve no purpose but to weaken the Yuan. Capital not put to productive use will be reflected in a lifeless economy and weak currency value. Like building bridges and roads to nowhere, very very stupid. Misallocation of resources, this is very big reason for troubles ahead.

    The foreign credit ratings will be relevant Only if China Need to Borrow from overseas lenders much like US borrow with the Treasury Bills.

    Like

    • Joseph says:

      Actually, it was China who saved America from 2008 US Financial meltdown. What the American should concern now is, do they have something that China thinks worth saving in the next US Financial meltdown? Oops!!

      Like


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