Five views on Moody’s downgrade of China
25 May 17
Asset managers comment on Moody’s decision to lower China’s sovereign credit rating by one notch to A1 from Aa3, with stable outlook.
Luc Froehlich, head of investment directing of Asian fixed income at Fidelity International, is still confident in the Chinese bond markets despite the downgrade.
“The downgrade is yet another sign of the challenges faced by China, which is juggling rising leverage issues, declining economic growth rates and ongoing structural reforms,” he said.
“We are confident that China’s central bank and its regulators are firmly in control of the situation. In particular, China’s recent regulatory tightening should help deflate the country’s credit markets and lead to long-term market stabilization.”
He noted that the Chinese central bank had been tightening the market liquidity since February 2017.
“The PBoC’s tightening measures are taking place alongside a series of regulatory measures aimed at tightening interbank liquidity and reining in non-bank lending (shadow banking).”
Fidelity believes however that China is well-shielded from a liquidity squeeze − which might lead to a debt crisis − due to China’s high savings rate, capital control measures and high level of government support.
Still, the risks include a policy mistake, in which “a misstep could send tremors across markets”, he noted.
