Moody’s says it may upgrade the sovereign rating of China from its current A1 level. That would put it on a fast track to match the levels of several other European nations with faltering economies. It would also underscore recent observations from the IMF that many developed nations will have long periods of slow growth but that China will not.
Moody’s is particularly impressed with the rate at which China emerged from the global recession and credit crisis. It also cited the success of the government’s stimulus package and the fact that China has been able to successfully withdraw it without apparent economic damage.
“We took the view that the government’s very strong credit fundamentals would likely restart an improving trend as the Chinese economy emerges and stabilizes from the effects of the global recession. In addition, we premised our action on the ability of the Chinese authorities to protect systemic stability from the underlying threats arising from the extraordinary credit expansion evident in 2009,” says Tom Byrne, a Moody’s Senior Vice President.
Moody’s was careful to describe the two threats to China’s economy: (1)A recession among China’s export customers in the US and EU and (2) China’s exposure to trade and currency “frictions.”
What the report did not say, because it was not the place of its authors to comment, is that trade difficulties would do such damage to the global economy that it would cause the downgrades of sovereign debt around the world. Trade wars would push the prices consumers and enterprises pay for imports up sharply and would create barriers to exports. The economic nationalism inherent in any major trade dispute would press most nations to survive largely on their own economic production, thrown back on their own natural resource and consumer bases.
As odd as it may seem, the credit risks to American debt may be less than those of China in a prolonged series of currency and trade disputes. The US consumer may not have the muscle that they did four years ago, but they are still mightier than the Chinese, which have only begun to emerge and would be wiped out by large factory layoffs that would come if China’s manufacturing machine was damaged by a trade war. That would cause worker unrest in the People’s Republic, a possibility that Chinese leaders have already raised in public. Widespread strikes and violence are less likely in the US where the services economy is shaky, but intact federal safety nets are still in place.
China’s economic outlook is good today, but that could change in a few short months.
Douglas A. McIntyre
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