Friday was a signal day for China. It had to contend with the bad news (for the Communist Party leadership) of a leading (and jailed) dissident winning the Nobel Peace Prize; but the day also brought the good news that the country’s international credit standing looks like being upgraded by one of the major ratings groups, Moody’s.
The news from Moody’s was a major surprise as rivals like Fitch and Standard & Poor’s have shown no sign of re-examining China’s credit standing.
The move also makes a mockery of the criticisms of the US ratings groups from Chinese government spokesman and ‘independent’ Chinese credit ratings groups who have been prevented from opening in the US. Moody’s has moved even before these Chinese groups to re-rate China.
Importantly, Moody’s said future credit losses will be mostly absorbed “by the banks themselves, either from capital, or from future earnings”.
That would seem to put an end to all those warnings about real estate bubbles and damage to the country’s banks and financial system (which ignored the fact that the banks are still state controlled).
Many of the warnings came from hedge funds or their mates in the broking or investment banking sectors.
Incidentally, some of the same people have warned about Australia’s so-called housing bubble.
The news also came on the eve of the IMF and World Bank autumn meetings in Washington where China came under more pressure to float the Yuan or allow it to move more freely.
In fact in an almost symbolic move China’s Yuan climbed to its highest level since 1993 as the country’s financial markets reopened after a five-day holiday during which the dollar had slumped.
The currency climbed as much as 0.25% to 6.6744 per dollar. It later hit 6.704 in unofficial forward trading. That left it up around 2% since the unpegging decision was made in June.
The Shanghai stockmarket jumped 3.1% on Friday; its biggest rise in four months, after news of the Moody’s move was made known.
China is not the only emerging economy to be placed on a possible upgrade list by Moody’s.
Last week it also raised the outlook on Turkey’s rating for local and foreign-currency debt to positive from stable.
The firm also said Colombia may be raised to investment grade next year, and the rankings of Bolivia, Paraguay and Uruguay may also increase.
This is a sign that the strong and continuing growth in emerging economies in Asia and Latin and South America is soundly based and not being financed by government sleight of hand or other dubious financing tricks (by boosting borrowings) as countries like Argentina have indulged in past years.
By contrast to what Moody’s said, rival Standard and Poor’s said on Friday that the public debt in some of the world’s largest economies is on an “explosive path”.
Interestingly Moody’s said in its statement that it was confident China’s largest banks weren’t materially damaged by the global crisis and aren’t likely to pose any “sizable contingent liability risk to the government’s balance sheet”.
Moody’s stated that the main reasons for the decision were:
1. The resilient performance of the Chinese economy following the onset of the global financial crisis, and expectations of continued strong growth over the medium term.
2. The government’s quick, determined and effective stimulus program, the unwinding of which has begun.
3. The lack of erosion in central government financial credit fundamentals, and the likely containment and effective management of prospective, contingent losses arising from the extraordinary credit expansion in 2009.
The orchestration of an extraordinary economic stimulus program has so far only modestly affected government finances. With a policy intention to contain the budget deficit to 3% of GDP this year, and with the likelihood that direct government debt will remain below 20% of GDP, the government will likely be able to finance its deficits readily and at low cost from the country’s large pool of national savings…
With net international financial assets equal to about 50% of GDP — bolstered by almost $2.5 trillion in official foreign exchange holdings — only a handful of highly rated advanced industrial economies, such as Norway, Switzerland, Japan, Hong Kong and Singapore, have a stronger international investment position than China…
Although Moody’s has concerns over the intrinsic, stand-alone strength of China’s banking system, we nonetheless recognize that its largest banks have not been materially damaged by the global crisis. Therefore, the dominant banks in the system will not likely pose any sizable contingent liability risk to the government’s balance sheet.
Moody’s further expects that future credit losses — arising from the surge in lending in 2009, from exposure to the property market, from risky loans to local government financing vehicles, and from off-balance sheet operations in the “shadow” banking system — will be mostly absorbed by the banks themselves, either from capital, or from future earnings.
However, transparency is lacking on the extent of such potential losses. While uncertainty persists about the size and soundness of off-balance sheet local government financing operations in particular, we also believe that the central government has ample fiscal headroom to absorb future losses.
