“Moody’s downgrades China,” proclaims many a recent headline, while the accompanying article warns that a credit explosion will continue even as growth slows. Sounds serious, doesn’t it? Should we be concerned?
Ratings agency downgrades are nothing new. The U.S. had a downgrade earlier in this decade, as had the U.K. and many other countries. Life goes on, and even for countries with large external borrowings, costs rarely rise by much — if at all.
There are exceptions, of course. Just think of Greece and many of the Southern European states whose borrowing costs rocketed. But the cause was not only downgrades. In the case of those countries, there had been a profound and sudden loss of market confidence in their ability to service their debt. And therein lies one of the issues for China.
Although China’s economy-wide debt is already 256% of GDP and rising, much of it is funded internally. It is not reliant on overseas investors, and as such is easier for the Bank of China to manage. According to a report in The Telegraph, China’s government debt-to-GDP ratio is expected to rise only gradually to 45% by the end of the decade, which is in line with similar countries rated at an “A” investment grade.
The downgrade has so far been confined to Moody’s, which dropped China’s rating by one notch from Aa3 to A1, keeping it apparently within investment grade territory. Moody’s pressed Beijing to accelerate supply-side reforms as the country faces challenges in the years ahead of an aging population, slowing productivity growth and the legacy of excessive state led investment.
Growth is predicted to slow to 5% from current 6.7% levels by the end of this decade. But while that is “poor” for China, it is still exceptional for any other country of comparable size. Read more