China Rating and Rebalancing

On the day FitchRatings (majority French owned) downgraded the outlook on US rating, it had also released a statement on China’s single A rating and how it was contingent on rebalancing occurring. There was also a small research note attached to that press release. Both were useful. The media ignored that, (un)surprisingly.

In fact, the sense one got that if the US AAA rating was undeserved (“The U.S. is the most heavily indebted ‘AAA’ rated sovereign, with a gross debt ratio equivalent to double that of the ‘AAA’ median.”- Fitchratings), then China’s single A rating too was rather undeserved and based on the arguments that Fitch had put out and on the basis of the evidence of the last two months (credit spigots opened up), there were both necessary and sufficient grounds to downgrade China or at least put its rating on a negative outlook already.

You can find Fitch press release here. It contains the link to the underlying report that has the analysis.

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2 thoughts on “China Rating and Rebalancing

  1. This report is interesting no doubt. But I can’t help but wonder if a CA deficit in China (i.e., S<I) is such a bad thing?

    It would be bad if "I" keeps rising and ultimately results in incremental output falling behind the growth of debt service costs; and in which case asset creation is basically worthless.

    On the other hand if "C" rises smartly and dampens "S" then that may be precisely the kind of rebalancing that is required.

    Will China become vulnerable to global capital flows? That depends on what drives the CAD and the acceptability of the RMB as a settlement currency.

    Meanwhie, I can't help but notice every global/regional financial centre grasping at the Dim Sum investment quotas coming their way.

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    1. CAD in China is not a bad thing but we have to see if Europe would have to run an even bigger CA surplus or would the US swing into one too to balance that. For the US to swing into a CA surplus, perhaps, it has to revoke the ban on oil export. Then, one wonders if OPEC and particularly, Saudi Arabia would be pleased. It would be good for Asia if oil price tumbled but Saudi Arabia can let know its displeasure in more ways than one which raises the cost of ‘living’ for the rest of the world. China’s stop-go monetary and credit reflation and restraint would not end well, in my view.

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