The market may have long since moved on from Moody’s downgrade of China to A1 from Aa3 (by now even long-only funds have learned that in a world with $18 trillion in excess liquidity, the opinion of Moodys is even more irrelevant), but for Beijing the vendetta is only just starting, and in response to Tuesday’s downgrade, China’s finance ministry accused the rating agency of applying “inappropriate methodology” in downgrading China’s credit rating, saying the firm had overestimated the difficulties faced by the Chinese economy and underestimated the country’s ability to enhance supply-side reforms.
In other words, Moody’s failed to understand that 300% debt/GDP is perfectly normal and that China has a very explicit exit strategy of how to deal with this unprecedented debt load which in every previous occasion in history has led to sovereign default.
The Ministry of Finance reaction came after Moody’s first, and very, very long overdue, downgrade of China since 1989 citing concerns about risks from China’s relentlessly growing debt load as shown below.
“China’s economy started off well this year, which shows that the reforms are working,” the ministry said in a statement on its website. Actually, it only shows that China had injected a record amount of loans into the economy at the start of the year, and nothing else. And now that the credit impulse is fading, the hangover has arrived.
Moody’s on Wednesday also downgraded the ratings of 26 Chinese government-related non-financial corporate and infrastructure issuers and rated subsidiaries by one notch. It also downgraded the ratings of several domestic banks, including the Agricultural Bank of China Limited’s long-term deposit rating from A1 to A2. It also eventually downgraded Hong Kong and said credit trends in China will continue to have a significant impact on Hong Kong’s credit profile due to close economic, financial and political ties with the mainland.
…click on the above link to read the rest of the article…