Moody's lowering credit outlook on China is misleading, unwarranted
Published: Dec 10, 2023 09:35 PM
Illustration: Chen Xia/Global Times

Illustration: Chen Xia/Global Times

New York-based rating agency Moody's lowered China's credit outlook from stable to negative last week, a change that has baffled many investors, although it maintained an A1 investment-grade rating on Chinese sovereign bonds. Moody's explained that China's local government debt could be unsustainable in the face of a downsizing property sector and that the central government may need to bail them out.

But the research by Moody's team on China's fiscal conditions and economic fundamentals was biased, if not peppered with geopolitical calculations to serve a misleading purpose. Some in the country are wary that international investors could be agitated and frightened away by the outlook change. It is highly unlikely that sophisticated investors, with their independence in thinking, will suddenly become hesitant when it comes to investing in Chinese assets.

There are a range of facts that support the health of China's economic fundamentals. The Chinese central government's debt accounted for merely 21.4 percent of the country's nominal GDP in 2022, the lowest among the world's major economies, compared to Germany's 66.4 percent, the US' 121.3 percent and Japan's 226 percent. China is the world's largest trade power. In 2022, Chinese exports of goods amounted to $3.59 trillion, while imports added up to $2.72 trillion, creating a trade surplus of $870 billion. Despite a slide in external demand this year, the country's yuan-denominated trade surplus has reached 4.78 trillion yuan ($667 billion) in the first 10 months of the year, up 3.2 percent year-on-year. 

Based on these numbers alone, it isn't difficult to conclude that China's economy remains vibrant and healthy. The country has a large buffer to cushion against shocks, preventing an interim economic problem from developing into a bigger challenge. The central government has ample resources and policy tools to address the hidden debts held by local governments. 

The Chinese government can take steps to mitigate the housing sector flop with effective policy support measures. This can include reducing the down payment ratio and mortgage rates, cutting transaction taxes, and removing stringent restrictions on purchasing multiple apartments by a family as the government has revamped its previous one-child policy to the current three-child policy. 

Recently, housing sales across the country's first- and second-tier megacities have increased significantly, several Chinese cities have seen a rebound in land sales to developers too, ensuing a much valued revenue stream for local governments. The government is hopeful that the post-pandemic downturn in real estate construction and urban property prices could be resolved through a period of proactive government-orchestrated readjustment. 

It is natural for China's Ministry of Finance to publicly display its disapproval and refute Moody's lowering its credit outlook, which is widely considered misplaced and unfair. Few in economic circles would share or understand the befuddled logic behind Moody's credit outlook change for China from stable to negative. The rating agency's concerns about the country's economic development prospects and fiscal sustainability are unwarranted. 

Through a number of metrics, the credit outlook cut on China is inaccurate, problematic and tricky. The resilience of Chinese economy is a hallmark of itself, and has been witnessed by the whole world over the past 40 years as it has achieved unbroken rapid growth and scaled new heights. Inadvertent shocks like the 1997 Asian financial crisis, the 2008 global financial crisis and the 2020 COVID pandemic did not impair the country's development. Additionally, advertent suppression by the US to launch the trade and technology war hasn't dented the country's growth momentum. 

Any efforts aimed at impeding or stifling China's future growth will fail, and likely backfire on the US economy. After the US erected trade and technology barriers in the late 2010s, China quickly awakened, realizing the importance of constantly shoring up the country's own technological innovation ecosystem. For instance, massive monetary and human resources have been diverted to fortifying China's own semiconductor research, design, production and supply chain, till the country is able to make all types of chips independently. 

The uneven economic recovery in the first half of 2023 was a short-term phenomenon related to policy choices, as China refrained from taking drastic measures to stimulate the economy. Since July, however, Beijing has ratcheted up policy support. The central government has issued new special bonds of 1 trillion yuan to augment local fiscal spending, in addition to allocating local governments 1.5 trillion yuan of government bonds to swap their short-term commercial debt. Meanwhile, bank lending has roared back for qualified property developers. These measures have started to pay off, as testified by recent gains in profitability of Chinese enterprises.

For a time, some Western pundits have continued to hype up the challenges faced by China, claiming the economy is losing momentum and faces a downhill slide. Much of their talk or chosen narrative is politically biased and economically flawed. How is a colossal economy like China's, which grew 5.2 percent in the first three quarters of 2023, losing momentum? Moody's last week also lowered the credit outlook on eight of China's largest banks including ICBC, China Construction Bank, Bank of China and China Development Bank. It's a ridiculous and laughable outlook change since those lenders, among the world's largest, are well-capitalized and have very low ratios of bad loans. Without doubt, the eight banks are not troubled with staggering arrears and their debt sustainability is exceptionally strong. 

Others in the West allege that China's short-term fluctuations reflect the country's "long-term structural problems," implicitly criticizing Chinese modernization. However, with the CPC leading the way, Chinese modernization will be underpinned by market-based reforms and constant opening-up and integration with the world, which is in contrast to the unconventional moves of high tariffs, de-globalization or fermenting "small yard, high fences." 

And, a key ballast of Chinese modernization will be its technological innovation capacity, which has a close bearing to the country's future growth prospects. Recent qualitative developments in the Chinese economy may signal the dawn of an era of inspirational industrial revolution, with Chinese scientists and engineers breaking tech bottlenecks one by one. China's success in the renewable energy sector, including electric vehicles, batteries, solar panels, and wind turbines, is undeniable. In fact, China is on track to surpass Japan as the world's largest automobile exporter this year.

Moody's should pay more attention to the new economic driving forces and tech-led transformation taking place in China, and exercise caution before assigning the "negative outlook" to such a dynamic economy. Moody's should never underestimate Chinese government's ability to navigate the challenges and uncertainties of the global economy through effective policy maneuvering.

The author is an editor with the Global Times.