Moody's cut to outlook is flawed, ministry says

Ratings: Questions raised in past too

The cutting of China's credit outlook by rating agency Moody's is unwarranted and flawed, as the move overlooks the solid growth potential of the world's second-largest economy and exaggerates the financial risks facing it, officials and experts said on Tuesday.

Stating that it is "disappointed with" the cut, the Ministry of Finance said in a statement on Tuesday that "concerns of Moody's about the prospects of China's economic growth and fiscal sustainability are unwarranted".

The ministry said the impact of a real estate market downturn on the fiscal conditions of local governments is "controllable and structural". The proportion of real estate-related tax revenue in local fiscal revenue has not fallen significantly, and the size of implicit debt of local governments has decreased and mitigated relevant risks.

"New growth drivers of China's economy are playing their role, and China is able to continuously deepen reforms to address risks and challenges," the ministry said, adding that the economy will further recover in the fourth quarter and contribute more than 30 percent — based on the International Monetary Fund's forecast — of global growth this year.

The statement came after Moody's affirmed China's A1 long-term local and foreign-currency issuer ratings on Tuesday but changed its outlook on China's government credit ratings to negative from stable, citing lower medium-term economic growth and ongoing downsizing of the property sector.

Moody's said in a report that authorities would provide support to financially stressed local governments and State-owned enterprises, posing broad risks to China's fiscal, economic and institutional strength.

"The rating agency's understanding of how the Chinese economy works and how the Chinese government functions is not deep enough and does not reflect the reality," said Feng Qiaobin, deputy director of macroeconomic research at the Development Research Center of the State Council.

Feng said the agency failed to take into consideration the country's most recent policy support to the property market and the effects to be delivered. "China has made adjustments in property, financial and bond issuance policies…S&P global ratings in its recent report said a bottom is in sight for China's developers."

It isn't the first time that Moody's rating results are being doubted. US Treasury Secretary Janet Yellen recently rebutted Moody's downgrade of the United States' credit outlook. Moody's last cut China's local and foreign-currency issuer ratings in 2017, from Aa3 to A1.

Li Ruoyu, a researcher at the State Information Center, said Moody's outlook downgrade is unconvincing as it underestimates China's economic growth in both the short and medium term.

China's GDP is forecast by Moody's to grow by 4 percent next year, lower than the IMF's forecast of 4.6 percent. "Moody's forecast is obviously lower than China's potential growth rate," Li said.

While Moody's predicts China's economy will expand 4 percent in 2025 and 3.8 percent on average from 2026 to 2030, Li said that estimates from various other institutions show that China's potential economic growth rate would reach between 4 percent and 5 percent from 2025 to 2030.

"China will remain a key engine of global economic growth in the future," the finance ministry's statement said, as the country's vast domestic market and an orderly transition in growth engines will underpin high-quality economic development at a reasonable growth rate.

As for local government debt risk resolution, the ministry said China is establishing market-oriented, law-based mechanisms to address existing local government implicit debt while resolutely forestalling any new implicit debt from emerging.

China has completed the work to categorize the debts raised by the so-called local government financing vehicles and has identified debts that need to be addressed. Contrary to estimates of many institutions, the figure is far less than the 61-trillion yuan ($8.54 trillion) official government debt, said Qiao Baoyun, dean of the China Academy of Public Finance and Public Policy at the Central University of Finance and Economics.

Some institutions have overestimated the size of implicit debt as they forget some local government financing vehicles are market entities with healthy cash flows and their debts will not likely default, Qiao said, adding regions like Guangdong province and Shanghai have already finished defusing the hidden local government debt risk.