Getting ahead of the curve
Credit rating agency Moody's has revised its outlook on China's sovereign bond rating from stable to negative.
To be clear: Moody's did not downgrade China's sovereign bond rating (which remains A1), just the outlook for the rating.
The announcement, published on Tuesday, said Moody's believes Beijing will ramp up fiscal support for financially stressed localities and SOES, posing:
- “Broad downside risks to China's fiscal, economic, and institutional strength”
It also cited increased risks from a structural economic slowdown and the ongoing property crisis.
ICYDK: Moody’s last changed China’s credit rating in 2017, downgrading it one notch from Aa3 to A1.
The finance ministry (MoF) was not pleased, saying Moody's concerns are "unnecessary," because:
- Beijing has successfully mitigated local government debt risks.
- The economy is on track to hit its growth target and has substantial long-term growth potential.
- The impact of the property market decline on local government revenue is “controllable and structural.”
Get smart: Credit rating agencies are sensitive to criticism that they didn't cut sovereign ratings fast enough during the global financial and Eurozone crises.
- Moody's is wary of making the same mistake again, so is getting out in front of China's debt problems.
Our take: This will further weigh on investor sentiment, but we don't expect Moody's revised outlook to have any material impact on China's debt financing costs.
- China's debt is largely funded domestically, meaning debt costs are less susceptible to shifts in international investor sentiment.
Our other take: China's local government debt won't necessarily result in a crisis, but it will certainly be costly to clean up.