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.


Moody’s lowers China outlook after Fitch downgrade


Moody’s Investors Service on Tuesday affirmed China’s government’s bond rating of Aa3 but cut the outlook to stable from positive, the second pessimistic revision by a foreign ratings agency this month.

Last week, Fitch Ratings cut China’s long-term local currency credit rating to A-plus from AA-minus, citing concerns about the risk that excessive local government borrowing posed to the wider economy. Moody’s referred to the same issue in justifying its negative revision.

“Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased,” it said.

Moody’s said it affirmed the Aa3 rating because of China’s credit fundamentals, which have been underpinned by continued robust economic growth, strong central government finances and an exceptionally strong external payments position.

The report said more reform would be necessary to prevent a buildup of pressures that could increase the risks of a hard landing for the Chinese economy. But it credited China for maintaining better fiscal metrics than Belgium or France, and noted that China’s massive international investment position means its external assets exceed its domestic liabilities to the tune of $1.8 trillion.

“Only a handful of highly rated advanced industrial economies – such as Norway, Switzerland, Japan, Hong Kong and Singapore – have a stronger international investment position.”

China has seen rapid credit expansion as a result of Beijing’s stimulus in 2008-09 to counter the global crisis, but the country has had trouble shaking off the hangover created by sloppy asset allocation and investment bubbles resulting from the flood of cheap cash.

Local government financing vehicles stand accused of making investments in vanity projects and ghost cities that are unlikely to produce sufficient returns to pay off bank loans.

The head of China’s National Audit Office (NAO) recently estimated that outstanding debt of local and central governments was 15 to 18 trillion yuan — equal to 29 to 35 percent of GDP — at the end of 2012.

But even as Beijing has moved to clean up balance sheets at Chinese banks, borrowers and lenders have collaborated to develop new forms of off-balance sheet financing that regulators feel are both concealing and complicating the risk bad loans pose to the wider economy.

Source: Reuters “Moody’s lowers China outlook after Fitch downgrade”