China’s Credit Downgrade

As you may or may not know Moody’s has downgraded China’s credit rating. Remarks Michael Schulman at Bloomberg:

On Tuesday night, Moody’s Corp. downgraded China’s sovereign credit rating for the first time in 28 years. In doing so, the rating agency is acknowledging the dragon in the room: China will have to pay the price for its epic debt binge, whatever policymakers do from here.

The burning question in China these days is whether the government is serious about tackling the debt pile that’s exploded since the global financial crisis. Total outstanding credit grew to around 260 percent of GDP at the end of last year, from 160 percent in 2008 — one of the biggest and fastest expansions ever. Officials say they’re keenly aware of the need to deleverage, and there’s evidence that recent efforts to deal with the problem are starting to have an impact. What’s uncertain is whether the government has the will to push ahead with reforms even as companies start to default and the economy slows.

Here’s my question. China is a monetary sovereign, almost all of its debt is internal, and the government has a majority ownership of most of its banks. What difference does its credit rating really make?

Just for perspective, the U. S. does not have the very highest credit rating. That’s reserved for countries like Canada, Australia, Luxembourg, and Switzerland.

2 comments… add one
  • CuriousOnlooker Link

    And the most important point — China does not have an open capital account.

    Prettis has been pretty clear on this, there’s a small chance the debt could cause a financial crisis or that it won’t be repaid. What’s far more likely is a Japan scenario — low to zero growth over many years as the debt is rolled over / written off in real terms through time.

  • Although there’s no universally-accepted measure of how open or closed a country’s capital account is, according to the Chinn-Ito index China’s is one of the most closed.

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