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.
Chi Lo, senior economist for Greater China at BNP Paribas Investment Partners, said that the downgrade “lacked foresight” and that it might affect the upcoming launch of the Bond Connect.
“The impact on China’s asset market has been muted for the simple fact that China’s debt is mostly funded by domestic savings and thus it is more stable than most analysts have realised,” he said.
“The Chinese authorities are well aware of the debt problem and have started tackling it through practical means,” he continued.
The measures include a debt-swap programme started in 2015 with the aim to pare the debt burden of the LGFVs, a debt-equity scheme to deal with non-performing bank loans, and setting up of provincial “asset management companies” − which manage bad debts − to absorb regional banks’ loan losses.
“The downgrade serves as an international warning on the `China risk’ at the time when Beijing is opening its onshore bond market to foreign investors and striving to have A-shares included in the MSCI and other international market indices,” he noted.
Commenting on the impact on the Bond Connect, widely expected to be launched on July 1, he said: “It may be more expensive for the authorities to get the scheme off the ground or risk a launching delay with a lower credit rating.”
