China rating downgraded

Posted: May 25, 2017 in Uncategorized

After many warnings from Moodys, the IMF and S&P, Moodys moved and downgraded China rating (but with stable outlook to soften the blow).

Logically the Chinese Government was furious as they say say they are enacting reforms and the Chinese Debt to GDP is about 40% (Eg Australia is 41%) (Note in reality the big issue is that the Debt is held at regional level so does not show in the Western Debt to GDP measure – so it much higher the real one is somewhere between 250% and 300% (Font The economist, CNBC, Bloomberg).

The market did not move much on the news as the Chinese market is self contained (most of the corporate debt is owned by Chinese that, correctly, do not care or trust US rating agencies) and probably in China you would not dare to short the market on such a news, if you cared for your family.

The real bad outcome is the classic rating agency behaviour that always worsen the situation (as the reader should I am really against rating agencies).

During the Global Financial Crisis, first the rating agency committed the error of rating very good bad product (as they misunderstood them or got paid to misunderstand) and then, by downgrading the rating during the GFC created even more problem).

Now the issue with this rating (and probably a soon to be rating downgrade of S&P) is that Chinese corporation will not be able to get debt overseas – so they will ask debt from China provoking an increase of the debt issue.

Still China, being self-contained, has more time than a normal country to fix the problem …but not infinite.

So the issues are two – the downgrade worsen an already bad situation and it is hard to see how China can enact the needed reforms and keep the GDP growth at 6.5%pa (even if it is manipulated).

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