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2 Mar 2016
China: Moody’s downgrades sovereign rating outlook - ING
Tim Condon, Chief Economist at ING, thinks that the Chinese economic and policy weaknesses exposed since 811 warrant a 3-A (single A from the three agencies) sovereign rating.
Key Quotes
“We forecast a 25bp PBOC rate cut in the current quarter, and we think the opening of the NPC on Saturday makes this weekend attractive.
Moody’s downgraded the outlook on China’s Aa3 long-term foreign currency sovereign debt rating to Negative from Stable citing ongoing and prospective weakening of the public finances evident in rising government debt and large and rising contingent liabilities, falling foreign exchange and fiscal reserve buffers, and uncertainty about the government’s ability to implement economic reforms. Improved confidence in the economy and policies, a moderation of capital outflows, progress on SOE and financial sector reform and further capital account opening were need for a return to a Stable outlook.
We see in the Moody’s outlook downgrade a recognition that the re-pricing of China risk since the 811 devaluation is persistent. 811 amounted to a second hit to global manufacturing, the first being the commodity price crash in the second half of 2014. The manufacturing double whammy increased the urgency of industrial and financial sector restructuring at the same time that the authorities’ espousal of “supply side reform” made clear that China’s would not be an Anglo-Saxon approach. Uncertainty about growth and, as a consequence, macro policy is elevated and our baseline is that post-811 increase in financial market volatility persists.
Prior to 811 we considered China a 6-A sovereign, i.e. deserving of a double A rating from Moody’s, S&P and Fitch. As a matter of fact it was a 5-A sovereign with Fitch’s A+ the single A outlier. We think the economic and policy weaknesses exposed since 811 warrant a 3-A sovereign rating.
5-year China CDS traded above the 75-100bp range it had been in since 2013 in August 2015 (latest 132bp). A one-notch downgrade is worth 25-30bp, which makes the new trading range for sovereign CDS 100-125bp, in our view, but we expect it to remain above the range until some of the elevated uncertainty dissipates.”
Key Quotes
“We forecast a 25bp PBOC rate cut in the current quarter, and we think the opening of the NPC on Saturday makes this weekend attractive.
Moody’s downgraded the outlook on China’s Aa3 long-term foreign currency sovereign debt rating to Negative from Stable citing ongoing and prospective weakening of the public finances evident in rising government debt and large and rising contingent liabilities, falling foreign exchange and fiscal reserve buffers, and uncertainty about the government’s ability to implement economic reforms. Improved confidence in the economy and policies, a moderation of capital outflows, progress on SOE and financial sector reform and further capital account opening were need for a return to a Stable outlook.
We see in the Moody’s outlook downgrade a recognition that the re-pricing of China risk since the 811 devaluation is persistent. 811 amounted to a second hit to global manufacturing, the first being the commodity price crash in the second half of 2014. The manufacturing double whammy increased the urgency of industrial and financial sector restructuring at the same time that the authorities’ espousal of “supply side reform” made clear that China’s would not be an Anglo-Saxon approach. Uncertainty about growth and, as a consequence, macro policy is elevated and our baseline is that post-811 increase in financial market volatility persists.
Prior to 811 we considered China a 6-A sovereign, i.e. deserving of a double A rating from Moody’s, S&P and Fitch. As a matter of fact it was a 5-A sovereign with Fitch’s A+ the single A outlier. We think the economic and policy weaknesses exposed since 811 warrant a 3-A sovereign rating.
5-year China CDS traded above the 75-100bp range it had been in since 2013 in August 2015 (latest 132bp). A one-notch downgrade is worth 25-30bp, which makes the new trading range for sovereign CDS 100-125bp, in our view, but we expect it to remain above the range until some of the elevated uncertainty dissipates.”