Moody's Investors Service Has Mixed Feelings About China's Economy

Forex News

Economists at Moody's Investors Service reported that China's economic restructuring is getting faster and manufacturing sector is gradually moving towards higher value-added, credit positive sectors. Chinese government managed to reduce excess capacity in heavy industry to improve profitability, cut high debt levels and encourage factories to switch to higher-value output like robotics and aerospace.

Managing director of Moody's Sovereign Risk Group, Marie Diron, noted: "If such measures lead to a reallocation of labor and capital resources that shift credit towards sectors with higher productivity growth, it will support the Chinese government's credit quality by increasing its debt-carrying ability".

Moody's revised down China's sovereign credit rating by one notch to A1 in 2017, worrying that debt might keep rising. China and the rest of Asia are struggling with external risks like U.S. tariffs. Still, according to Lillian Li, a vice president at Moody's Credit Standards and Research Group, China will keep working on high-tech sectors, with or without U.S. supplies. The vice president stated: "China has the financial and policy levers to pursue this plan, and sustained higher public-sector spending would not materially alter its fiscal strength and sovereign credit profile".

Moody's Sovereign Risk Group projects more credit defaults in China. Firms with poor balance sheets as well as companies that rely on short-term debt for refinancing will be the main victims. Risk aversion is growing on concerns about the fundamentals and liquidity of issuers. Moody's also thinks Chinese banking system’s growth will slow down.