Why markets undisturbed by Moody's downgrade of China rating

Updated 2017-05-25 14:00:31 Xinhua

Moody's downgrade of China's credit rating has little impact on markets as investors remain optimistic about China's economy outlook.

The rating agency said it has downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

It claimed the reasons behind the move are expectations that China's economy-wide debt will continue to rise as potential growth slows and that the country's ongoing reforms will not prevent the rise in leverage.

The markets, however, were generally undisturbed by the downgrade.

The Shanghai Composite Index closed up 2.13 points or 0.07 percent to 3,064.08 on Wednesday, reversing a decline in early trading the same day.

The offshore yuan dropped slightly against the U.S. dollar. The Australian Dollar, liquid proxy for China-related trades, headed lower initially but recovered all their losses afterwards.

Economists and analysts attributed market calmness to investors' belief that the fundamentals of Chinese economy are still stable and the rating agency has overestimated the difficulties in managing debt risks.

"I don't think there's much to the news. The fact is that China is still growing around 7 percent per year and they have considerable reserves," Gib Dunham, CFA with Hywin U.S. Capital Management, told Xinhua.

He noted that China is going in the right direction in a policy point of view.

Courtney Rickert McCaffrey, a consultant in A.T. Kearney's Global Business Policy Council, told Xinhua that market reaction might have been limited because "the Chinese market continues to attract a significant amount of foreign investor interest."

According to McCaffrey, China remains both the highest-ranked emerging market and the highest rated Asian market in A.T. Kearney's 2017 Foreign Direct Investment Confidence Index, and it continues its streak among the top three markets for FDI throughout the entire almost 20 year history of the Index.

Stephen Simonis, Sr., chief currency consultant for FXDD Global, said while Moody's downgrade was no surprise, "the rating change will carry very little impact on the Chinese economy and its policies."

Investor confidence in Chinese economy is supported by ample positive indicators.

The country's gross domestic product grew 6.9 percent in the first quarter of 2017, higher than the full-year target of 6.5 percent and the 6.8 percent growth in the fourth quarter of 2016.

For the first four months this year, fiscal revenue, a gauge of the government's ability in macroeconomic regulation, jumped 11.8 percent, compared to 8.6 percent for the same period last year.

China's Ministry of Finance, in a statement dismissing Moody's decision, said "the economy is expected to maintain steady and relatively fast growth thanks to the deepening reforms in state-owned enterprises, finance, taxation and pricing, in addition to the implementation of the Belt and Road Initiative."

Experts believe debt risks are manageable in China with its fiscal firepower, minimal foreign debt, and abundant foreign reserves.

Brad Setser, senior fellow at the Council on Foreign Relations, said it is important to recognize that China's external balance sheet remains quite strong.

"China's 3 trillion (dollars) in formal reserves easily covers all of the external borrowing of China's government, its banks and its firms," Setser told Xinhua.

He added that "total government debt is modest for an economy that saves as much as China."

The National Development and Reform Commission, China's top economic planner, said Wednesday that deleveraging, as a major task of the country's supply-side structural reform, was making progress and China's debt risks were controllable.

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