Japan’s Mizuho Financial Global issued an interesting article on Moody’s downgrade of China’s credit rating outlook to "negative" from "stable".
In an outright rebuttal to Moody’s actions, the Japanese financial institution issued scathing criticism of the rating agency, including statements such as "Western concerns over Chinese monetary policy are ludicrously misplaced".
It’s an interesting quick read for a Monday morning – if you have not already read it.
Here is the article in its entirety:
Moody’s Investor Services, the U.S. credit ratings agency, moved to downgrade its outlook on China to "negative" from "stable". Just a few days before the country’s National People’s Congress assembles to decide on implementation of its 13th 5-year plan, one would have expected such a profound decision to be accompanied by a suitably sharp dip in the Shanghai Composite and yet … nothing.
Well, actually, that’s not quite true since both the Shanghai Composite and the Shenzhen Composite ended their sessions more than 4% higher than where they began. This raises the question: does anyone really care what Moody’s thinks about China? You’ll no doubt remember Moody’s and its two main rivals in the world of credit ratings, Standard & Poor’s and Fitch Ratings, from the monumental subprime debacle. All three of these agencies were paid – BY THE ISSUERS – to give AAA investment grade ratings to packaged CDOs (collateralized debt obligations) containing mortgage loans that had been granted to borrowers without proof of income. Those ratings reassured investors who bought them hand over fist; when the US housing market imploded, those CDOs found themselves at the center of a liquidity and confidence crisis that almost destroyed the global financial system.
Their outlook downgrade revolves, it seems, around doubts they harbor over Beijing’s ability to push through structural reforms designed to put China’s economy on a more sustainable footing. The most visible of these reforms is the ongoing drive to rebalance the economy away from what has been an excessive reliance upon exports towards a bias on domestic consumption and services. For the most part, that transition has been proceeding in an orderly fashion. Indeed, exports have fallen while consumption has increased considerably.
"We couldn’t really put our finger on what Moody’s found so objectionable," noted Frank Temple who, Vice President of Corporate Trading at Mizuho Financial Global who oversees $1.5bn in client funds. "The service sector now accounts for just shy of half of China’s GDP." But Moody’s cited other concerns including the sharp decline in China’s foreign currency reserves as raising a question over the sustainability of the People’s Bank of China’s (PBoC) efforts to defend the country’s currency, the renminbi.
Granted, the PBoC has spent $762 billion of its reserves of $3.3 TRILLION in the foreign exchange markets but how, exactly, is this a source of anxiety for Moody’s or any Western investors? Western concerns over Chinese monetary policy are ludicrously misplaced. The PBoC are nowhere near exhausting the limits of what conventional monetary policy can achieve.
"With benchmark rates at over 4%, they still have room to maneuver; compare 4% with the US Fed Funds rate or the ECB’s deposit rate and one could remark that Moody’s should be looking closer to home," added Frank Temple.
"Rather than joining Moody’s and agonizing over China’s economy, Mizuho Financial Global are busy preparing to upgrade their ratings on a slew of Chinese mainland stocks that they expect to perform well over the next 12 months as the Chinese economy improves," concluded Frank Temple.