Economy

Moody's Cuts China Outlook as Prospects Wither

Douglas A. McIntyre

Published: March 2, 2016 4:58 am

Last Updated: January 13, 2020 12:30 pm

As China’s PMI continues to contract and the government works to shore up its bank and public company equity systems, Moody’s has downgraded its outlook on its sovereign debt from “stable” to “negative.” For the time being, its senior unsecured debt will keep its Aa3 rating. How long it will hold that rating is anyone’s guess, particularly if China’s GDP begins to drop toward 6%. (Many analysts believe China overstates that number anyway.)

Reuters recently reported:

China aims to lay off 5-6 million state workers over the next two to three years as part of efforts to curb industrial overcapacity and pollution, two reliable sources said, Beijing’s boldest retrenchment program in almost two decades.

Even for a nation China’s size the action is telling. And there is now way to know what the jobs cuts are in the private sector.

Moody’s analysts wrote:

The key drivers of the outlook revision are:

1. The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet.

2. A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks.

3. Uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy.

At the same time, China’s fiscal and foreign exchange reserve buffers remain sizeable, giving the authorities time to implement some reforms and gradually address imbalances in the economy. This underpins the decision to affirm China’s Aa3 rating