What are the risk of Chinese debt to $27 trillion

Photo: Aly Song / Reuters

Wednesday, may 24, Moody’s for the first time since 1989, downgraded the sovereign credit rating of China, citing large debts and the slow reforms in the country. RBC understood that the decision for China and the world economy

How do you evaluate China rating Agency?

Wednesday, may 24, Moody’s Investors Service for the first time since 1989, downgraded the sovereign credit rating of China from Aa3 (“very low credit risk”) to A1 (“low credit risk”), setting the rating with a stable Outlook. The Agency explained the slow pace of reforms, the large debts of countries in 2016 reached $27 trillion, or 264% of GDP, according to Bloomberg Intelligence. S&P evaluates the credit rating of China at AA- (“very low credit risk”), the forecast “negative”, Fitch at A+ (“low credit risk”), Outlook “stable”.

Previously, their assessment of China’s economy made the index provider MSCI. Henry Fernandez, the head of the company, which has three times refused to include in its benchmark emerging markets with a market capitalization of $1.5 trillion of Chinese shares, said that the country “has many problems that need to be addressed” before this will be possible. These include concerns regarding financial oversight and openness to international investors. Another decision on this issue will take MSCI June 20. Inclusion in the MSCI index of Chinese stocks would help Beijing to make its market attractive to foreign investors, says the FT.

Although Moody’s lowered the rating of the Chinese for almost 30 years, other rating agencies do this more often. The latter was Fitch, which downgraded the sovereign rating of China in 2013. Moody’s first assigned a rating to China in 1988 and lowered it until today, only once — after the crackdown of protests in Tiananmen square.

What does the decision by Moody’s to China?

The decision to downgrade was made could not be out of place, writes Bloomberg. Right now China is seeking to open its bond market to foreign investors, simplifying the process of investment in the domestic market through Hong Kong. Moody’s rating will complicate attraction of the foreign capital, especially against the background of slow structural reforms, an analyst at Bloomberg Intelligence’s Tom Orlik. However, it will have for the country so the negative effect that it had on other States with a high dependence on foreign capital (in China, it accounts for 12% of GDP 30% of GDP on average for emerging markets, according to the IMF).

The volume of Chinese bonds owned by foreign investors, fell at the end of March to 830 billion yuan ($120 billion) from 853 billion yuan at the end of December, from the data of the Central Bank of China. It is less than 1.5% of all Chinese market bond with a volume of 63.7 trillion yuan, calculated by Bloomberg, or about 3% of the bond market, according to estimates by the investment provider Investec Asset Management. Despite a weak dependency on foreign Finance, Moody’s analysts believe that Beijing should strengthen the basis of its national economy and to carry out painful reforms. In the past the authorities have already promised to reduce risks in the financial sector, but the economy is still available cheap loans. In addition, some industries have accumulated a very large debt in foreign currency.

What was the reaction of the markets?

Although shares in Shanghai immediately after news of the downgrade, fell 1%, by the end of the Chinese trading day, they fully played the fall. Western exchange virtually ignored the news — nothing new to report, Moody’s markets did not bring, and so they knew about the debt problems of China. UBS economist Paul Donovan expressed the reaction of the markets: “One of the credit rating agencies — what, no one cares — downgraded the credit rating of China at some level to some other level, nobody cares what”.

Photo: Stringer / Reuters

The Chinese authorities rejected the Moody’s rating. Approval of the Agency that the debts of local authorities and state-owned companies will increase the contingent liabilities of the government, “completely groundless,” commented on the decision by Moody’s, the Ministry of Finance of China. The Agency underestimated the ability of the government to intensify reforms and to increase demand, said the Ministry. The amount of debt China has not changed in 2016 compared to 2015 and debt risks will not change in 2018-2020, said the Chinese Ministry of Finance.

As interpretiruya the downgrade of the rating experts?

“The pace of progress [in the economy of China] is slowing and in some areas work is being done in the wrong direction, says Orlik. — The share of inefficient public sector in GDP is increasing. The debt load in the economy continues to grow, its growth significantly ahead of GDP growth”. The growth of bad debts amount to more than 15% per year, says Bloomberg. And the growth of the national economy in 2011 demonstrates only a single value and continues to slow.

Foreign investors look for a compromise between the need for reforms and the need to ensure achievement of target GDP growth as a harbinger of further uncertainty, said Bloomberg senior analyst financial Hong Kong company Bocom International Holdings, Hao Hong. “The laws by which the Chinese market are different from the laws that operate in global markets, and foreign investors have already got used to it,” concluded Hong.

The decision by Moody’s evidence of the growing doubt that the government in Beijing will be able to reduce the prohibitively high level of debt load and to ensure sustainable growth of economy in the conditions of the next round of permutations in the leadership of the Politburo, which will occur in the autumn in the framework of the 19th Congress of the Chinese Communist party. Such appointments are made once in five years, and this year the leaders will change some important financial and economic institutions, wrote in February, The Wall Street Journal.

“This [Moody’s] the psychological impact, which is not like China; it indicates the increasing pressure on the financial market, — quotes Bloomberg the Professor of the HSBC business School of Peking University in Shenzhen Christopher Boldin. — While “in the context of the broader picture it means little, as holders of the greater part of Chinese debt are Chinese state or quasi-state formations and international investors represent only a minimal percentage of the total number.”

How China can reduce their debt?

To get rid of the $27 trillion of debt without economic growth is a very complex task, writes Bloomberg. And it’s all because China is one of the drivers of the world economy. One solution is restoring order in the banking sector, more support borrowers. However, due to the last country can get bogged down in bad debts and switch to a lasting stagnation.

Photo: Peter Nicholls / Reuters

The task is complicated by high rates of new borrowing, rendering it difficult to determine the proportion of “problem loans”. The problem is exacerbated by shadow banking, including for the services in the segment of wealth management (management of assets of wealthy individuals), which some observers compared to subprime loans that triggered the mortgage crisis in USA in 2007. The Chinese authorities gradually allow more defaults, and the banks began to exchange costly loans to the local authorities, cheap bonds issued under the state program, the volume of which can be increased up to 15 trillion yuan ($2.2 trillion).

According to experts-optimists, the problem of Chinese debt are exaggerated: the company and local authorities are unable to solve due to the growth of the economy, its growth will support borrowers and push up inflation, which will reduce the burden of payments on loans. This is also facilitated by high Deposit rates and positive current account balance. According to experts-pessimists, by itself will not resolve the problem; government must deal with problem debts and delete the new defaults. In particular, they need to cut interest rates to expand the program of debt exchange, to prevent non-Bank lending, encourage fundraising through the sale of assets and shares. According to the analyst Charlene Chu from consulting firm Autonomous Research Asia, the risks in the Chinese economy are increasing and the government needs to pour into her trillions of dollars.

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