Warnings about rising debt have not gone down well with China's leaders. But without some drastic action a similar crash to the west's 2008 will become increasingly likelyby George Magnus / June 1, 2017 / Leave a comment
Last week, Moody’s Investor Services, one of the three main credit rating agencies, downgraded China’s sovereign credit one notch from Aa3 to A1. This affects the terms on which the government and its sub-national institutions can borrow money.
My own reaction to this news was “who cares?” China has precious little foreign debt, and what it does is denominated in its own currency.
Judging by Beijing’s reaction, though, I couldn’t have been more wrong. You’d have thought Moody’s had insulted President Xi Jinping himself. So what does the Moody’s announcement signify, and why does this esoteric credit news matter?
The Chinese Finance Ministry and the two main state media outlets, People’s Daily and Xinhua News, all laid into Moody’s because it had warned that China was likely to experience steadily escalating levels of debt, especially as economic growth slowed down. It was accused of presenting a misleading picture of China’s economy; overestimating the difficulty of boosting economic growth, and underestimating China’s capability in pushing ahead with supply side reforms and stronger demand (though it isn’t clear how you can do both); lacking knowledge of China’s laws and regulations and so concluding incorrectly that higher borrowing by local governments and state enterprises would lead to higher government debt; and losing credibility (along with other western credit rating agencies) because of its ingrained, flawed methodology.