Christopher Balding, an associate professor at the HSBC School of Business at Peking University in Shenzhen, believes Beijing won’t be happy about Moody’s move:
“It is a psychological blow that China will not take kindly to and absolutely speaks to the rising financial pressures.
“it doesn’t matter much in the grand scheme of things because so much of Chinese debt is held by state or quasi-state actors and minimal amounts are international investors.”
Kit Juckes of Societe Generale says that investors won’t be badly alarmed.
Moody’s downgraded China’s credit rating overnight, to A1 with a stable outlook, from Aa3. There was an initial risk-averse reaction but this has been mostly reversed in the last few hours.
The stable outcome and the fact that rating agencies are more market-following than market-leading, not to mention recent Chinese equity market under-performance, all argue that there’s no new news in this move. And so, the market reaction is to buy the dip, yet again.
Analysts at Macquarie Group point out that Moody’s downgrade brings them into line with Fitch; so will Standard & Poor’s be the next to downgrade China?
S&P has had China on outlook negative since February 2016, indicating there is a potential downgrade brewing. But S&P currently rates China one notch above Moody’s and Fitch, so a cut would not break new ground.”
The Chinese government has tried to dismiss Moody’s downgrade.
It claims the move is based on an inappropriate, “pro-cyclical” approach, that is too gloomy about China’s current situation and future potential.
In a statement, the Minister of Finance says:
“These viewpoints overestimate the difficulties facing the Chinese economy and underestimate the capabilities of China to deepen supply-side structural reform and expand overall demand.”
Big news from China this morning. Moody’s has downgraded the country’s credit rating for the first time in almost three decades.
Moody’s warned that China’s financial strength is likely to deteriorate in the coming years, as its economy slows and its national debt keeps rising.
It’s a one-notch downgrade, from Aa3 (the fourth-highest rating) to A1.
In a statement, Moody’s explains that Beijing is likely to drive borrowing levels higher as it tries to transform China into a consumer-driven economy.
And it fears that Beijing’s reforms will not fully offset the rise in economic and financial risk,
As Moody’s put it:
The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows.
“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.”
The agency added that debt levels across the Chinese economy are likely to keep climbing:
“Moody’s expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage.
The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.”
The move hit shares in China, sending the Shanghai Composite Index down to its lowest level since last October.
Holger Zschaepitz (@Schuldensuehner)
#China stocks and currency got hit by Moody’s rating downgrade. Shanghai Comp drops to lowest since Oct. pic.twitter.com/YUxL4xGZuw
The agenda: US dollar; Greek fallout; ECB speeches
Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.
Today we’ll be watching the US dollar. After being buffeted by Donald Trump’s travails, the greenback has shaken off its recent weakness as investors wonder whether the Federal Reserve could raise interest rates again in June.
The minutes of the Fed’s meeting are due out tonight (7pm BST), and could give some new clues about its next step.
CMC Market’s Michael Hewson explains:
The US dollar appears to have caught itself a bit of a break yesterday ahead of the release of the latest Fed minutes.
In the last week or so market odds of a June rate rise have fluctuated quite sharply, though the consensus still remains that it remains more or less a done deal. I still have doubts about that but the Fed do appear to have boxed themselves into a corner for a move in June, and one that they may find difficult to extricate themselves from if things do go a bit pear shaped in the next few weeks.
Another central bank will also be in focus; European Central Bank president Mario Draghi is giving a speech on Financial Stability in Madrid this lunchtime.
The ECB’s chief economist Peter Praet is also on duty, and speaking at an event on “25 Years of the Association of Banks in Bulgaria” in Sofia, Bulgaria.
There may be developments in Greece, where the government has returned empty-handed from Monday night’s eurogroup meeting. Pressure to unlock its next bailout payment in time for debt repayments in June is intensifying.
In London, the court battle between Royal Bank of Scotland and irate shareholders who supported its 2008 rights issue continues. Will the investors accept RBS’s last-minute compensation offer, or will they insist on seeing ex-CEO Fred Goodwin in court?
Andrew Peaple
