Leading economic and financial figures from China have used the 2017 Davos Forum as a venue to pillory Moody’s recent decision to downgrade the country’s sovereign credit rating.
Speaking at a Davos panel on the global impact of Chinese financial reforms, Li Fu’an, Bank of Bohai chair, said that the ratings agency had failed to undertake a truly in-depth study of the Chinese economy or grasp its objective circumstances.
At the end of May Moody’s downgraded China’s sovereign credit rating for the first time in nearly three decades, reducing it from Aa3 to A1, due to concerns over the country’s mounting debt levels and expectations that an ongoing deleveraging drive will yield only limited results.
While acknowledging that excessively high or rapidly expanding leverage would undoubtedly put pressure on the real economy, Li noted that China’s leverage gains only commenced in earnest after the Great Financial Crisis, and that its total leverage rate remained close to those of developed economies.
Li Daokui, Mansfield Freeman Professor of Economics and Director of the Center for China in the World Economy at Tsinghua University, said that as a ratings agency Moody’s lacked a full understanding of the Chinese economy, and that there was thus no need to take its opinion seriously.
Jing Ulrich, vice chair of Asia Pacific at JPMorgan Chase, noted that China’s leverage has remained at very high levels over the past decade, and now reached 260% of GDP.
According to Ulrich, however, the difference between China’s debt situation and that of other countries is that Chinese householders are savers, and the level of central government debt is extremely low.
In her opinion it would not be unreasonable to keep government debt growth and GDP growth at even levels in future, as well as embark upon reforms of China’s state-owned enterprises, which are major source of borrowing within the economy.
Ulrich also noted that while local government debt remains high in certain areas, the situation had improved of late, and further deleveraging could be achieved by providing local governments with better funding sources, as well as more clearly demarcating their specific roles vis-a-vis the central government.
Li Fu’an that while debt-fuelled spending by Western governments is directed mainly at public goods such as social welfare or relief provision, in China local government spending is directed mainly at supporting the real economy in the form of investment in infrastructure, and creating improved conditions for other sectors of the economy.
In Li’s estimation high leverage amongst local government should not pose a problem for their repayment capability, as it will create improved regional conditions for wealth creation and raise tax revenues.
