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Wan LixinOpinion deputy editor of Shanghai Daily
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US investors have faith in China’s economy
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US investors shrugged off financial service agency S&P’s decision to downgrade China’s credit ratings, and believed China’s economy would continue to be one of the key drivers of global economic growth.
S&P Global Ratings said on Thursday that it had lowered China’s sovereign credit rating to A+ from AA-, citing economic and financial risks from the country’s fast credit growth.
“S&P’s decision ignores the reality that China’s credit has been slowing with an increased policy focus on containing and diminishing debt,” said Brendan Ahern, chief investment officer of Krane Funds Advisors.
“I do not believe investors, foreign nor domestic, will be influenced by the S&P decision,” Ahern added.
Tom Orlik, Bloomberg’s chief Asia economist, echoed that the move by S&P Global Ratings is likely to have little impact on investor sentiment or China’s funding costs.
“China borrows very little from overseas, which means the impact of the downgrade on its funding costs will be limited,” Orlik said in a note.
Borrowing from abroad is in mid-single digit as a percentage of total borrowing, according to Bloomberg Intelligence Economics’ calculations.
He said the chances of a major adverse reaction to the S&P downgrade is limited.
“Rating agencies play a role in forming an investor’s opinion though one should always rely on your own due diligence,” said Ahern.
The Ministry of Finance said on Friday that it was a “wrong decision” for S&P to downgrade China’s sovereign credit rating.
Calling the reasoning “cliche,” the ministry said it was a pity for S&P to focus on China’s fast credit growth and debt issues but ignore the country’s distinctive financing structure, the wealth-creating effect of government spending and its support for growth, as well as sound development fundamentals and growth potential.
“The S&P ratings cut is a belated recognition of a serious problem that China has already begun to address,” said Stephen Roach, a senior fellow at Yale University and former chairman of Morgan Stanley Asia.
The finance ministry said China had always attached importance to the local government debt problem and would continue fiscal reform to ensure healthy finances.
The People’s Bank of China, the China Banking Regulatory Commission and the State Council have all taken explicit actions in 2017 to reduce the expansion of debt — especially the mounting indebtedness of state-owned enterprises, Roach said.
“These efforts now seem to be having a positive impact. According to the Bank for International Settlements, China’s ‘credit gap’ — its quarterly debt/GDP ratio relative to the long-term trend in this ratio — actually declined in the final two quarters of 2016 after having increased almost steadily since late 2011,” Roach said.
He said this is an important step “in the right direction” — and hopefully recent policy actions noted above will reinforce this deleveraging in the quarters ahead.
Meanwhile, missing in the S&P debt assessment was recognition that China’s outsize reservoir of domestic savings — nearly 48 percent of GDP in 2016 — provides the nation with an important cushion that other overly indebted economies lack.
“A high-saving Chinese economy mainly owes debt to itself — very different than classic debt crises triggered by an outflow of foreign investors who were investing their surplus saving in China,” Roach said.
Ahern also mentioned that China’s sovereign debt is held by domestic investors in yuan. Issuing foreign currency-denominated debt is how sovereign debt becomes compromised which is not the case for China.
In addition, many analysts believe China’s economy will continue to be one of the key drivers of global economic growth.
Roach said China’s high saving offers an effective “insurance policy” that reflects a very high priority on “financial stability.”
“As long as China continues to emphasize financial stability — and takes actions aimed at promoting it — the threat to growth and development should not be serious,” Roach said.
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