Moody’s brings China down a notch

Moody’s brings China down a notch

Today is not a great day to wear a Moody’s polo shirt in Beijing. But it would be a mistake to read too much into the agency’s downgrade yesterday.

Moody’s lowered China’s rating to A1 from Aa3. It also changed its outlook to stable from negative. This is the first time the ratings agency has downgraded China since 1989.

“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,” said Moody’s.

The Chinese government has reacted by saying that the downgrade is “absolutely groundless” and that the agency is using “inappropriate methodology”. It may also have bought a few shares today.  Chinese stocks rose 1.8% this morning – the biggest gain in nine months – despite the rating.

The downgrade is not a surprise as Moody’s had placed China’s outlook to negative in March 2016. The country is now rated the same as Israel, Japan and Saudi Arabia.

The downgrade is most significant for airlines and leasing companies looking to raise capital abroad. But Chinese airlines have been switching to domestic bonds for more than a year now. Ironically analysts say that the downgrade means that Chinese companies are likely to borrow even more from domestic banks.

Chinese leasing companies will also continue to be able to source debt. On Tuesday, Fitch – which already rated China A+ – said that it believes the Chinese leasing companies are set to keep growing quickly.

Unless it is the first one on a bedpost, a single notch rarely makes a serious difference to things.

Alex Baldwin
By Alex Baldwin May 25, 2017 15:05