Impact of First Ever Negative Credit Ratings On China
Like India’s PSU banks owning up to its humungous NPA
problem that involves practically the Who’s Who of Indian business and Industry,
alongside its medium to small players, China too is also facing up to its
massive debt now.
China had also hidden it away, undifferentiated between the
recoverable and the bad debt, so far, under multiple headings and separations
between central, provincial, and local government.
But, along with the worrisome news flow from China’s opaque
financial system, there are increasing global concerns on whether it will be
able to manage its economy without dreaded severe dislocation. These, if they
come, will have a serious knock-on effect, a new financial tsunami, sweeping
over an already battered and fragile world economy, as well as on the one and a
half billion Chinese people themselves. Could a Chinese financial collapse trigger a
new recession/depression far worse than 2008? Yes, it definitely could.
Is there any chance of an implosion? It depends, as it has,
in the West, on the sheer size of its bad debt, from its decades of
borrow-and-spend state run growth. How much is still hidden away?
There have already been a number of steep and unprecedented
falls in the Chinese stock markets where the people punt, and quite a bit of involuntary
devaluation in the Chinese external currency, the Yuan.
The Chinese government has responded with cuts in the bank
reserve ratios, rendering them more precarious in effect, and arbitrary
containment actions on the bourses, to try and artificially break the fall and
control the rates of descent. So far, they seem to be coping, but it is
difficult to gauge the extent of the rot.
China had already been firmly down-graded to ‘Negative’ from
‘Stable’ by the important international credit rating agencies: Moody’s and
Fitch on 2nd March 2016.
This was an important marker of international sentiment and
outlook for the $12 trillion economy. But the revision in financial confidence
was largely resented and criticised as an over-reaction by Chinese officials
and insiders themselves.
Still, the downward ratings early in March seemed to assert
that whatever the Chinese authorities have been doing to fix their economy over
the last year, has not delivered up to expectations.
And this downgrading has been applied to China’s credit
rating for its government borrowing programme in bonds, both from the mainland
and Hong Kong, as also, as of the 31st March, more ominously, to its
overall sovereign rating.
Coming on top of calls for Xi’s resignation from open
letters online and a domestic Chinese media watchdog website, and grumblings in
the Chinese establishment on the present leadership, the downgrades may spell
out further trouble and forecast destabilisation. This even though the Chinese authorities
deny any such possibility, cracking down swiftly at the first signs of unrest.
But nevertheless, not
only will the rerating have a profoundly negative effect on China’s ability to
borrow internationally at favourable rates of interest from now onwards, till
the position is remedied, but it will also put considerable pressure,
downwards, on the value of its currency- the domestic Renmimbi and the external
Yuan.
China says that its present credit ratings still best those
of any others in the region, though it no longer compares with the stronger No.
1 US economy, that is actually growing
again.
A more or less
universally negative credit rating has been applied to the second largest
economy in the world though for the very first time, and there are comments
that this could be extended further if things do not improve.
Reasons being cited by S&P, Moody’s and Fitch, amongst
the biggest and most internationally respected credit rating agencies, include
‘deteriorating fiscal strength, falling foreign currency reserves, and
uncertainty about Beijing’s commitment to reforms’. There is also criticism of
further and new rising debt and enhanced capital outflows. The rich Chinese are
buying properties abroad, especially in the West, and moving their money out of
the country.
The first to cut forecasts on China’s future outlook on 2nd
March were Moody’s and Fitch. They have now been joined, on the 31st
by Standard & Poor (S&P), which has cut China’s sovereign credit rating
to ‘negative’ from ‘stable’, while holding its credit rating at –AA.
It did likewise for specially administered Hong Kong, moving
the outlook to ‘negative’ from ‘stable’ as well, though once again retaining
its credit rating for the island’s
paper at AAA.
Criticism of these moves has come also from certain experts
and economists from within China, over this month, who say enough notice is not
being taken of the efforts to recalibrate the economy for sustenance over the
medium term. But the fact is, China’s economy is operating at ‘a 25 year low’,
and there are massive challenges, given the weak state of the global economy as
well.
However, putting a negative tag on the world’s second
largest economy is portentious, and difficult to shrug off. Will it affect China’s many infrastructure
building projects abroad, and indeed its ability to influence world events,
with its financial muscle dwindling?
By way of contrast, despite a sharply slowed Indian economy
in the 2012-2013 period, still struggling to find its stride in 2016, a
negative credit or sovereign rating has never come to visit so far.
Of course, India’s economy is only valued at $2 trillion. It
is a minnow economy, with little leverage beyond its already compromised banking system, unlikely
to have too much of an international impact either way. But its relative good
health due to conservative management, and the size of its large domestic
market, is attractive, at a time when all other large economies are either
stagnating or growing weakly.
Today, India is, as is
frequently pointed out, growing faster than China, and is, bizarre as it
may sound, versus the on-the-ground lack of evidence, the fastest growing economy
in the world.
India is clocking its GDP at some 7% to 7.5%, nearly a whole
percentage point or more than the erstwhile Middle Kingdom. It gets points for
its rectitude and discipline, deciding to stick to its fiscal deficit target of
3.5% of GDP, and also enjoys an admirable current account statistic. It also
has fairly buoyant foreign exchange reserves in the region of $ 350 billion. It
is expected to resume cutting interest rates in the next RBI review slated for
5th April, given a stable inflation scenario. The rupee is not
sliding quite as fast as it was against the US dollar either, and it is fixing
its banks.
The difficulties it faces are a much slowed economy, except
for government investment in infrastructure. There is no new investment cycle
emerging as yet, slow exports, a moribund stock market, very little new job
creation, and not much progress as yet on ‘Make in India’ or indeed on
structural reforms.
Still, in a comparative scenario with the region and the
world, there are several Indian initiatives that should bear fruit shortly
including the benefits of increased FDI and greater governmental momentum.
China’s rerating could certainly send more foreign
institutional investment towards India, as long as both economies keep their
heads above water, and China makes no big, swamping wave, of it.
For: Swarajyamag
(1, 194 words)
March 31st, 2016
Gautam Mukherjee
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