Moody's downgrading due to blinkered view: China Daily editorial
The disappointment the Chinese government has expressed at ratings agency Moody's move to change its outlook on Chinese sovereign bonds to negative on Tuesday is fully justified.
Moody's said the downgrade, its first for China since 2017, reflects the risks from lower medium-term economic growth and the financing troubles of local governments and State-owned enterprises.
The ratings agency has shown that as an outside observer using Western standards to gauge China's economic realities it doesn't have the necessary objectivity and perspective to have the proper understanding of China's economic operations, leading it to arrive at partial conclusions.
In the report it released on Tuesday, Moody's overestimated local governments' fiscal dependence on land sales revenue. The practice of fiscal operations over the years shows that net land income in local finance only accounts for 20 percent of land transfer revenue, and the proportion of the income from land sales in local fiscal revenue is even lower. Yet Moody's stated that land sales revenue accounted for 37 percent of the Chinese government's fiscal revenue last year.
Moody's assessment of financing vehicles debt issues is inaccurate as well. The central government has screened the debts of financing vehicles and some local State-owned enterprises, and classified them as hidden debts, for which local governments are not responsible.
The central authorities have a clear path and method for disposing of hidden debts, coordinating various funds, assets, resources and supporting policies and measures to resolve them. The risks of hidden debts are manageable.
Moody's concerns about China's economic growth prospects are also unwarranted. It has not taken into account the scarring effects of the COVID-19 pandemic on the Chinese economy are only now beginning to fade, as this is the first year that China has fully fired up its economy and its recovery is still picking up speed. Despite the "uncertain and grim" international situation, China's economy is expected to meet the growth target of 5 percent this year and continue to recover next year.
The fundamentals of the Chinese economy, which give it strong resilience, have not changed and the authorities still have wide policy space and the potential of deepened reform to tap in response to any risks and challenges that may emerge. As China fosters new growth drivers to make the transition to high-quality development, the Chinese economy will be on stronger footing to sustain future growth.
It is to be hoped that Moody's and other financial institutions can deepen their understanding of the realities of the changing Chinese economy so as to make their assessments more tenable and objective.