Moody's downgrades China - Outlook stable

Moody's downgrades China - Outlook stable

The main story of the Asian session is a decision from Moody’s to downgrade the Chinese rating to A1 from AA3 (while changing outlook to stable from negative). Here’s the reasoning:

  • Rating reflects expectations that China’s financial strength will erode somewhat over the coming years
  • Stable outlook reflects assessment that at the A1 rating level risks are balanced
  • GDP will remain very large ; growth will remain high compared to other sovereigns, potential growth is likely to fall in coming years
  • Economy-wide leverage will increase further over the coming years.
  • Indirect and contingent liabilities to increase
  • China’s growth potential to decline to close to 5% over the next five years
  • Government’s direct debt burden to rise gradually towards 40% of gdp by 2018 and closer to 45% by the end of the decade
  • Stable outlook denotes broadly balanced upside and downside risks.
  • China’s local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from AA3
  • China’s local currency bond and deposit ceilings remain at AA3.

In our view, this justification could make sense. While the Chinese growth remains high, it’s there because the authorities do not make sufficient efforts to deliver private sector. A scale of indebtedness is so high that it risks a serious crisis down the road and thus a warning is well justified.

However, market reactions have been muted. We have seen a nearly 2% decline in Hong Kong traded Chinese stocks (CHNComp) but it’s nothing unusual for this volatile index. Elsewhere on equity futures there’s barely any reaction. The Aussie has been down 0.4% today against the greenback but one could notice that the sentiment in general turned in favor of the US dollar ahead of minutes (today in the evening, 7pm BST).

link do file download link

CHNComp remains in an uptrend on a daily interval but the bulls have failed to make a fresh high for a while. A correction could be well warranted and Moody’s decision could be one of the triggers. Source: xStation5

In fact, looking at the AUDJPY cross which is often a good risk barometer, we could see that the pair is trying to recover. So all in all there’s a good chance that the markets ignore this warning. 

About Author

Our research team will provide all technical and fundamental news as well as all inside information coming from London's City desks to help investors trade fx and stock markets. Be sure that you already follow our twitter account @XMarketsuk in order to be up to date with all latest analysis, news and inside information.

Disclaimer: This material is considered a marketing communication and does not contain, and should not be construed as containing, investment advice or an investment recommendation or, an offer of or solicitation for any transactions in financial instruments. Past performance is not a guarantee of or prediction of future performance. X Markets and XSpot. do not take into account your personal investment objectives or financial situation. X Markets and XSpot. make no representation and assumes no liability as to the accuracy or completeness of the information provided, nor any loss arising from any investment based on a recommendation, forecast or other information supplied by any member of X Markets Websites’ team, a third party or otherwise. This material has not been prepared in accordance with legal requirements promoting the independence of investment research and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. All expressions of opinion are subject to change without notice. Any opinions made may be personal to the author and may not reflect the opinions of X Markets and XSpot. This communication must not be reproduced or further distributed without prior permission.

Risk Warning: Forex (FX) and Contracts for Difference (’CFDs’) are complex financial products that are traded on margin. Trading FX and CFDs carries a high level of risk since leverage can work both to your advantage and disadvantage. As a result, FX and CFDs may not be suitable for all investors because you may lose all your invested capital. You should not risk more than you are prepared to lose. Before deciding to trade, you need to ensure that you understand the risks involved taking into account your investment objectives and level of experience. Past performance of FX and CFDs is not a reliable indicator of future results. Most FX and CFDs have no set maturity date. Hence, a CFD position matures on the date you choose to close an existing open position. Seek independent advice.