Moody's China outlook downgrade does not tally with facts

BEIJING - The decision of rating agency Moody's to cut its outlook on China's sovereign bonds from stable to negative has raised doubts among economists, who said Moody's "just did not get it."

The agency's downgrade was based on expectations over China's fiscal strength will continue to decline, its forex reserves, and uncertainty about its ability to implement economic reforms.

Moody's missed the point when making its decision and it needs to improve its rating ability if it wants to maintain its influences, said Mei Xinyu, a researcher at Chinese Academy of International Trade and Economic Cooperation under the Ministry of Commerce.

On fiscal strength, there is a fundamental difference between the sovereign debt of China and that of most Western countries, he said.

Behind most of the Chinese government's debt is assets, as a high percentage of government spending goes into investment. That is why a similar debt ratio to China as in some developed countries would pose much less risks or mean much smaller burden on the government, said Mei.

The figures speak for themselves. International institutions usually use two indexes to evaluate a country's fiscal risks -- its deficit should not exceed 3 percent of its gross domestic product (GDP) and general government debt-to-GDP ratio should not exceed 60 percent.

Chinese official figures showed that China's fiscal deficit in 2015 accounted for 2.3 percent of its GDP. Moody's said China's government debt was 40.6 percent of its GDP at the end of 2015, and predicted it would rise to 43 percent in 2017, far below the 60 percent threshold.

In addition, Mei sees China's moderate expansion of fiscal deficit and debt on conditions of solvency as something positive, as it means China's monetary supply is adequate to meet economic growth demands.

On another account, even after several months of declines, China still holds $3.23 trillion in foreign exchange reserves.

This is by far the largest in the world and more than sufficient to pay off its foreign debt, Mei said.

What is more, China's trade surplus, which was $564 billion in 2015, and inflows of foreign direct investment, which was $126 billion in the year, is extra "insurance" against possible falling foreign exchange reserves, Mei said.

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