On Wednesday, Moody downgraded its prediction on Chinese government debt from “stable” to “negative”. The agency cited Beijing’s incapability to implement economic reforms, declining reserves and rising government debts.
Beijing’s downgrade came a few days before the National People’s Congress was due to decide on China’s 13th 5-year plan. The vote is a closely watched development strategy for the next 5 years that policy makers started compiling last year.
According to the report released by Moody’s on Wednesday, analysts will be closely watching the NPC’s final decision for clues on the direction of reforms as well as policymaker’s thoughts on the appropriate growth strategy for Beijing.
“Unless there are credible and efficient changes, China’s GDP growth is likely to slow down more significantly as the burden of debt discourages business investment and demographics become highly unfavorable. China’s debt is likely to increase more sharply compared to what is currently expected,” Moody’s said.
Moody’s explained that its rating committee had held discussions on China’s status on 9th of February, 2016. It is during this meeting that China’s fiscal and institutional ability as well as vulnerability to event risk were reviewed.
The agency has warned that it may downgrade China’s ratings further if there is evidence of further slowing down of reforms needed to support sustainable growth and protect the government’s balance sheet.
According to Trihn Nguyen, senior economist at Nataxis, China has a lot of room to make positive changes. Currently, the country has the lowest government debt as a share of GDP when compared to other emerging economies. And more importantly, China has surplus funds in a current account it can use for fiscal expansion.
Though there was little reaction from the market about this announcement, insurance rates for Chinese government debt went up slightly. Aida Yah, Senior Emerging Market Asia Economist explained that the reasons for Beijing’s downgrade are well understood by investors and most of them were already factored in.
