Needless to Read Too Much Into Rating Cut

By+Lan+Xinzhen

International rating agency Moodys Investors Service downgraded Chinas long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative on May 24. Officials from Chinas Ministry of Finance， the National Development and Reform Commission and the Ministry of Commerce as well as many economists expressed disagreement with the agencys rating immediately after the downgrade announcement. As a matter of fact， its unnecessary to react so intensively to the downgrade by Moodys because the fairness， professionalism and infl uence of the agency are questionable.

There should be a unifi ed standard for Moodys sovereign credit ratings. However， a review of the agencys rating results over the past years reveals that the agency has adopted a double standard in its ratings. Mostly， developed countries received a credit rating of Aaa or Aa. Although these countries have slower growth rates and some have much higher debt levels， their ratings are better than Chinas. Whats more puzzling is that the agency not only gave a credit rating of AAA to mortgage-backed securities issued by Fannie Mae and Freddie Mac before the subprime mortgage crisis， but also insisted that such securities had no major credit risks even after the crisis broke out.

In addition， as a private agency， Moodys may have distorted rating results on purpose to mislead investors for the purpose of profit. Moodys credit rating cut followed two policy changes in relation to China：

First， Chinese mainland and Hong Kong regulators gave the green light on May 16 to a long-anticipated cross-border trading platform called Bond Connect that makes the mainlands bond market more accessible to overseas investors. This is a major move aimed at opening up Chinas fi nancial sector， as policymakers seek to attract international capital such as sovereign wealth funds to enter the domestic bond market.

Second， China and the U.S. published the Initial Actions of the China-U.S. Economic Cooperation 100-Day Plan in May. According to the fifth article of the document， China is to allow wholly foreign-owned financial services fi rms in China to provide credit rating services by July 16. As one of the major credit rating agencies in the U.S.， Moodys is very likely to enter the Chinese market. By downgrading Chinas credit rating when no negative factors occurred and the economic growth rate rebounded in China， the agency is suspected of leveraging the infl uence of its rating to demonstrate its authority to enterprises and institutions so as to grab a larger share of the Chinese market.

In terms of professionalism， Moodys has used devel- oped Western economies economic rules， concepts and analytical frameworks to evaluate the Chinese economy， which will inevitably lead to biases.

According to Moodys official website， the downgrade reflects its expectation that Chinas financial strength will erode somewhat over the coming years， with economy-wide debt continuing to rise as potential growth slows.

Such expectations reflect a biased view of Chinas economic growth as well as a double standard.

Moodys expects the Chinese Governments direct debt burden to rise gradually towards 40 percent of GDP by 2018 and closer to 45 percent by the end of 2020. Even if Moodys predictions come true， such debt levels are still much lower than those of many countries whose ratings are much higher than Chinas， such as Japan， the U.S. and Germany， whose government debt levels reached 216 percent， 104 percent and 119 percent of their GDPs in 2016 respectively.

More importantly， Chinas overall debt level is moderate， and the country has very limited foreign debt. Therefore， its unprofessional to downgrade Chinas credit rating simply based on government debt. As of the end of 2016， Chinas foreign debt had totaled $1.4 trillion， while Chinas foreign exchange reserves had surpassed $3 trillion by the end of April 2017. Therefore the Chinese Government faces no threat of credit crisis.

Moreover， lukewarm market reactions to the downgrade show the minor infl uence of Moodys rating cut.

According to statistics from the National Interbank Funding Center， the yield on benchmark Chinese fi veyear government bonds spiked from 3.8 percent to 3.95 percent within several minutes following the downgrade announcement and returned to previous levels by noon the same day. Chinas capital markets also remained stable and experienced no major fluctuations. Apparently， few investors buy into Moodys rating results any more.

Moodys is actually serving the interests of itself and the Wall Street. Before the global financial crisis， Wall Street held sway over the global fi nancial industry. Therefore， Moodys influence was also sizable and the agency profited from such influence. However， in the wake of the fi nancial crisis， Moodys infl u ence has weakened along with the decline of the Wall Street. They are no longer able to exert as much infl uence on the global fi nancial markets as before.