Well, I guess it had to happen sooner or later and now it has. Moody’s finally plucked up the courage and downgraded China’s sovereign debt rating from Aa3 to A1 and in doing so formalised a fact of life which we all knew to be true but which nobody dared to articulate. Hundreds of articles over the past few years have pointed to what has become the largest elephant in the room, the huge amount of debt which the Middle Kingdom has been racking up at various levels and in various forms.
Not surprisingly the Ministry of Finance has come out fighting by claiming that Moody’s analysts don’t understand the many layers of public sector finance and the government’s ability to reform. To hark back to the late Mandy Rice-Davies, well it would do, wouldn’t it. We should never forget that underneath all the glitz and glamour of the rise of the Chinese economy there lies the base model of a command economy. It has been rest of the world’s belief, and if only for at best practical and at worst self-delusionary purposes, that Beijing can turn the taps on and off at will and that it the flow of growth were ever to decline to a trickle, there would be plenty of new pipelines which could be brought into play to make up for the softness elsewhere.
Unfortunately it’s all a little more complicated than that and Moody’s appears to have decided that constantly rearranging the deckchairs on the Titanic is no longer enough to satisfy its ratings requirements, That said, does anybody really care?
I suppose the point that commentators will be popping up left, right and centre will be boldly declaring that the downgrade will increase the cost of borrowing for the government and for its agencies. That’s a load of claptrap. If it were to have any validity, why would single-A Japan be paying 0.45% yield on its 10 year bonds when tripe A rated America pays 2.27% and equally triple A Switzerland’s 10 year bonds are trafficked at a yield of minus 14 bps? The level of interest paid is therefore obviously not linked to the sovereign rating but to monetary policy and, in the brave new world, the degree of central bank intervention in the bond markets by way of quantitative easing or whatever sobriquet is applied to government sponsored market manipulation.
A storm in a teacup