Yuan Tumbles As Moody's Downgrades China To A1, Warns On Worsening Debt Outlook

Tyler Durden's picture

Offshore Yuan tumbled as Moody's cut China's credit rating to A1 from Aa3, saying that the outlook for the country’s financial strength will worsen, with debt rising and economic growth slowing. This leaves the world's hoped-for reflation engine rated below Estonia, Qatar, and South Korea and on par with Slovakia and Japan.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government,” the ratings company said in a statement Wednesday.

And the most obvious reaction was Yuan selling.


Full Statement: Moody's Investors Service has today downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows. While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.

The stable outlook reflects our assessment that, at the A1 rating level, risks are balanced. The erosion in China's credit profile will be gradual and, we expect, eventually contained as reforms deepen. The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account.

China's local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.

China's local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China's short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1).


Moody's expects that economy-wide leverage will increase further over the coming years. The planned reform program is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole.


While China's GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus. At least over the near term, with monetary policy limited by the risk of fuelling renewed capital outflows, the burden of supporting growth will fall largely on fiscal policy, with spending by government and government-related entities -- including policy banks and state-owned enterprises (SOEs) -- rising.

GDP growth has decelerated in recent years from a peak of 10.6% in 2010 to 6.7% in 2016. This slowdown largely reflects a structural adjustment that we expect to continue. Looking ahead, we expect China's growth potential to decline to close to 5% over the next five years, for three reasons. First, capital stock formation will slow as investment accounts for a diminishing share of total expenditure. Second, the fall in the working age population that started in 2014 will accelerate. Third, we do not expect a reversal in the productivity slowdown that has taken place in the last few years, despite additional investment and higher skills.

Official GDP growth targets have also adjusted downwards gradually and the authorities' emphasis is progressively shifting towards the quality rather than the quantity of growth. However, the adjustment in official targets is unlikely to be as fast as the slowdown in potential growth as robust economic growth is essential to fulfilment of the current Five Year Plan and appears to be considered by the authorities as important for the maintenance of economic and social stability.

As a consequence, notwithstanding the moderate general government budget deficit in 2016 of around 3% of GDP, we expect the government's direct debt burden to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%) and higher than the median of Aa-rated sovereigns (36.7%).

We also expect indirect and contingent liabilities to increase. We estimate that in 2016 the outstanding amount of policy bank loans and of bonds issued by Local Government Financing Vehicles (LGFVs) increased by a combined 6.2% of 2015 GDP, after 5.5% the previous year. In addition to investment by LGFVs, investment by other SOEs increased markedly. Similar increases in financing and spending by the broader public sector are likely to continue in the next few years in order to maintain GDP growth around the official targets.

More broadly, we forecast that economy-wide debt of the government, households and non-financial corporates will continue to rise, from 256% of GDP at the end of last year according to the Institute of International Finance. This is consistent with the gradual approach to deleveraging being taken by the Chinese authorities and will happen because economic activity is largely financed by debt in the absence of a sizeable equity market and sufficiently large surpluses in the corporate and government sectors. While such debt levels are not uncommon in highly-rated countries, they tend to be seen in countries which have much higher per capita incomes, deeper financial markets and stronger institutions than China's, features which enhance debt-servicing capacity and reduce the risk of contagion in the event of a negative shock.

Taken together, we expect direct government, indirect and economy-wide debt to continue to rise, signalling an erosion of China's credit profile which is best reflected now in an A1 rating.


The authorities are part of the way through a reform program intended to sustain and enhance the quality of growth over the longer term, as well as to reduce the risks to the economy and the financial system posed by high corporate and, in particular, SOE debt. One related objective is to contain, and ultimately reduce, SOE leverage.

The authorities' commitment to reform is clear. It is quite likely that their efforts will, over time, improve the allocation of capital in the economy. Over the nearer term, the authorities have taken steps to contain the rise in SOE debt and to discourage some SOEs from further domestic and external investment, particularly in over capacity sectors.

However, we do not think that the reform effort will have sufficient impact, sufficiently quickly, to contain the erosion of credit strength associated with the combination of rising economy-wide leverage and slower growth. In particular, in our view, the key measures introduced to date will have a limited impact on productivity and the efficiency with which capital is allocated over the foreseeable future.

For example, one key set of reforms is the program of debt-equity swaps which aims to lower leverage in parts of the SOE sector, transferring the associated risks to the banking sector. At present, we estimate that the value of swaps announced is a very small fraction -- around 1% -- of SOE liabilities. Moreover, there is very little transparency about the terms of these transactions or their likely impact on SOEs' and banks' creditworthiness.

Other measures intended to improve investment allocation include negative lists on investment in excess capacity sectors and the introduction of mixed ownership. The former will likely reduce the major losses on investments of the past. However, excess capacity sectors only account for a small proportion of total investment. Only limited improvement in the allocation of capital would result from such measures. Meanwhile, mixed ownership is at a very preliminary stage, having been introduced in only a few dozen SOEs, and on too small a scale for now to have any impact on productivity in the economy as a whole.

Looking beyond the corporate sector, the financial sector remains under-developed, notwithstanding reforms introduced to improve the provision of credit; pricing of risk remains incomplete, with the cost of debt still partly determined by assumptions of government support to public sector or other entities perceived to be strategic. And with increased scrutiny of capital outflows, the capital account remains largely closed. While that insulates the economy and financial system from global volatility, it also constrains the development of domestic capital markets by limiting the flow of inward and outbound capital.

Overall, we believe that the authorities' reform efforts are likely, over time, to achieve some measure of economic rebalancing and improvement in the allocation of capital. But we think that progress will be too slow to arrest the rise in economy-wide leverage.

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Seasmoke's picture

Strange how Moody never downgrades the USD. $21Trillion and counting. Any day now I'm sure.

ebworthen's picture

Exactly.  Moody's...didn't they say Countrywide and AIG were "good as Gold" right before they had to be bailed out?

China will print to the Moon and back, just like the U.S.A.; except they now have the manufacturing.

China is moving into Africa and other continents, and building their Army using our money.

I'd bet on China before I bet on the U.S., if I were a betting kind of guy.

I'll keep it to Hold 'Em Poker in Vegas thank you very much.

Sinophile's picture

Don't forget that China holds more physical gold than any other nation on earth.

superivan's picture

In other news, the US national debt is $20 trillion and growing.  Last time its gold reserves were audited was more than 30 years ago and who knows how long the government can keep the manuipulated 1% GDP growth in the green zone.

superivan's picture

In other news, the US national debt is $20 trillion and growing.  Last time its gold reserves were audited was more than 30 years ago and who knows how long the government can keep the manuipulated 1% GDP growth in the green zone.

sinbad2's picture

I don't think China is printing, M2 is up about 10%, but their economy grew by 7%.

China seems to be saving, not by holding paper, but by investing in gold oil copper, and infrastructure.

Yohimbo's picture

China produces goods, productivity is at its core.  

china holds wealth and continues to accumulate

china is buying our food producers i.e. smithfield pork, and swaths of real estate

china is expanding its global influence  through trade

Its chinas century, and Murica is too malaised and "over" to do anything but fabricate an arbitrary ratings system.

Back to your fantasy video games (made in china) moodys.   



Yen Cross's picture

  That explains that massive spike up in usd/jpy and eur/usd again???   The new risk off currences are euro and yen. </sarc>

 I'm not seeing much growth, and equity markets aren't exhibiting much growth, based on breadth.

Juggernaut x2's picture

Until the yuan is depegged from the USD China will remain a secondary economic power

Cluster_Frak's picture

Chinese needs a deep debt market and a better rule of law. No serious money parks in cash and serious money loves rule of law (their law)

nmewn's picture

China has one of the largest issues in the world on its hands as far as societal stucture and thus ekonomee, over a billion people most of whom want to be rich.

Did I mention the government is communist? ;-) 

Justin Case's picture

It's difficult to find very many reasons to label China as communist these days. The ruling party in China still calls itself communist. The international media still likes to refer to China as communist. But where is communism still manifested in China today? Where are the basic Communist values of sharing and equality evident in Chinese society now? They cannot be found. Quite simply, China is no longer a communist country.

If we are looking for evidence of communism in China, the first and most important place to look is at the economy. The economy in China is now decidedly capitalistic in nature. Average Chinese citizens can start their own businesses and put their income into private bank accounts. Chinese citizens can buy stocks in companies and enjoy the revenues or suffer the losses. As of just a few years ago, private property rights have been greatly enhanced in China, and Chinese people can now be more secure that their land will not be taken away from them. Let us not forget about the heavy international investment that has been permitted in China which has played a major role in fueling this developing and booming economy. As a result, there are very rich people and very poor people in China as well as an emerging middle class. Chinese citizens, who always carried a good sense for business but were restricted from entrepreneurship in the past have now been more free to take risks and build successful companies. Thus capitalism has transformed the Chinese economy and changed people’s lives forever.

Some people just can't understand that China now employs capitalist and socialist economic policies! Its ridiculous! How can people be so stupid! China has been reforming from communism for 30+ years now. So many people never change their mind, but never over something so stupid! its not like this is up for debate, 10 minitues on google will show anyone that China is no longer 100% communist.

From Wikipedia, the free encyclopedia

The socialist market economy is the economic model employed by the People's Republic of China. It is based on the dominance of the state-owned sector and an open-market economy, and has its origins in the Chinese economic reforms introduced under Deng Xiaoping. The ideological rationale is that China is in the primary stage of socialism, an early stage within the socialist mode of production, and therefore has to adapt capitalist techniques to thrive. Despite this, the system has widely been cited as a form of state capitalism.[1][2]

It's time to update yoar fictional mindset and resist fake news narratives of demonizing labels of countries the administrations cannot conquer.

whatamaroon's picture

I see China in kinda of a Lazie-faire mode.

nmewn's picture

The Chinese government is no longer communist?...lol. 

Do you even realize you have to get a government permit to move? You can't just go to Wang's Rent-A-Trailer throw all your shit in there and move from Shanghai to Peking or Hong Kong. You need the permission of the state first. 

And if you're sitting around thinking what sets apart a communist from a capitalist is the accumulation of personal wealth then there's a whole shit pile of Russians who would beg to differ. They found out in short order that there was a bunch of oligarchs who had become extremely wealthy while the USSR was socialist. So wealthy in fact under "the control of Marxist-Leninist doctrines as forced down upon the proles by the politburo" they were running out of ink cutting all the checks to acquire "the peoples assets" when that government went tits up. 

Communism isn't just about some unicornish fantasy of shared wealth or redistribution of wealth as promoted by its particular brand of statists, its about the states control of wealth and the means of production. You should familiarize yourself with what a government sponsored enterprise is and what insidious things they are whether Fannie Mae or the Chonquing Iron & Steel Company. 

They are NOT capitalist.

Wild E Coyote's picture

LOL, i can see you are trying hard to find difference between Communist and Capitalist. 

They all are humans and all equally greedy. 

TradingTroll's picture

If China wasn't communist then the successful, wealthy Chinese entrepreneurs wouldn't be squirrelling away their wealth in non performing assets like overseas residential real estate.

You don't see the same capital flight USA to China.

And we haven't even touched on Bitcoin, one of the best barometers of China's unfriendliness towards capitalism.

Caledonian's picture

Chinese are going to be pissed. They may consider this an act of war.

peddling-fiction's picture

It is a prelude to more aggression.

Cluster_Frak's picture

BULLISH. A little western manipulation to fuck Chinese, any deep correction is a buy.

wisehiney's picture

Time to flee to treasuries.

Schmuck Raker's picture

Mnuchin to name Moody's a currency manipulator?

Laughing.Man's picture

Moody's?  Investors still heed their advice?

Cordeezy's picture

Could this lead to war? Moody's has proven untrustworthy now they are going to be messing with the belt and road initiative that China is so proud of


Justin Case's picture

The flagship projects include the $46 billion China-Pakistan corridor, a 3,000km high-speed railway connecting China and Singapore, and gas pipelines across central Asia. The Belt and Road initiative has also entered regions as far as New Zealand, Britain and even the Arctic.

Nearly $500 billion worth of projects and M&A deals were announced in 2016 across seven infrastructure sectors including utilities and telecoms in OBOR countries, a decline from 2015, according to a report from audit firm PricewaterhouseCoopers (pdf) in February. A third of the projects and deals were in China, PwC said, and the rest spread across other OBOR nations.

coast1's picture


alphasammae's picture

Moody still has USA rated AAA. Is it because it can print more $$$ to cover TB and budget needs? Hard to believe that helicopter FIAT paper will continue propping up AAA ?

NotApplicable's picture

Nukes, and other assorted weaponry.

Justin Case's picture

Moody still has USA rated AAA.

Because they want to stay in business. China was developing their rating system rather than using the corrupt merican bankster corporation. Recall the worthless mortgage backed securities( MBS) issued GS and others? AAA my ass! How many pension funds lost millions. Oh let's just keep that history hushed, like pizza gate. Moody's is full shit, as useful as the MBS.

GRDguy's picture

As Moody's largest investor, gotta wonder how much advance notice Warren Buffett gets.

That's how the rich gets richer. 

Let it Go's picture

The Chinese economy is being propped up by a stack of newly printed money. In a world where money flows across borders at the press of a button, it doesn't matter which major central bank is adding money to the system the effect is the same. Today money printed and injected into the economy of any country drives markets higher across the world by distorting demand and prices.

Those who doubt the power of cross-border money flows need only look to Vancouver Canada which has been forced to implement a foreign buyer tax in an effort to halt the rise in housing prices inflated by "hot money" from China. Toronto's housing market has also gone crazy with prices soaring 33% from the prior year. For more on just how much China is expanding its money supply see the article below.


Justin Case's picture

Yup, Sold the house last week as the second tier mortgage lenders experienced liquidity issues. The same way it started in 2007 and then cascaded across the financial system. Oh ya a Chinese buyer.

sinbad2's picture

Usually when the US trashes a currency, it destroys the country.

But it seems that Russia and China are aware of the US MO and are prepared.

Russia doesn't have the economic clout to shrug off a U$ economic hit, but they were prepared, and the country didn't collapse as the U$ expected.

China does have the clout, all this will do is improve their terms of trade.

The U$ keeps using the same old tired tactics, maybe the economic Pentagram needs some new ideas(people)

Yen Cross's picture

  YUm Yum > COT from 3-17. Notice the [ Non Specs -Eg; central banks]

 This isn't corp profit taking.

oncemore's picture

Moody's svindlers can rate their farth.

DEMIZEN's picture

is that the same moody that upgraded greece from negative to stable?

misalkin's picture

WOW that was a HUGE drop whole, 0.1% from 6.88 to 6.889.

The HUGE move was 2 times smaller that "move up" on the same day, and 2 times smaller than move down 2 days before. So generaly it is meaningless.

CHY is 1500% more stable than USD, we can see 1.5% moves on USD daily.

What's the point to report about CHY moves that are 15 times smaller than normal USD changes.

It dosn't add up - something fishy about this news - manipulation?


Dangerclose's picture

If Tyler had waited just another hour before posting that chart.......It retreated back just as fast. Guess we know where his money is placed! (short yuan) Yes I reacted too fast as well and now I'm at a loss. Damn that FOMO is a bitch!!

TheNuclearGenie's picture

The big question that no one is discussing enough is how do we solve the horrible overpopulation problem? A majority of the worlds population comes from only China and India. Mankind will soon regret the mistake of underestimating the dangers of overpopulation. A disease or limited nuclear war might be able to stop the detrimental effects of humans, but of course these are quite undesireable. Another way would be to restrict access to resources for the poor by some controlling mechanism that does not allow them to breed but that is quite a hard t hing to do.

Yen Cross's picture

 I get the fact that the euro is a funding currency. I don't get the fact that any hint of backing off Qe ffom th ECB won't explode sovereign yields,

 P.S French macro numbers suck ass.  #3 in europea.

tuetenueggel's picture

French are bankrupt. Germoney will follow if further muslim turds are sponsored the way it is now. Italy is more than bankrupt. Hopefully there´s enough paper to print more and more Euros. Zimbabwe is a good example. Their dollar is printed in Germany and carried in shiploads to former prospering Rhodesia. Fuck black morons.

tuetenueggel's picture

China will give a wet shit on US-Rating morons.

Just grip you own nose an say: hey stupid. who rated subprime shit some time ago ????

earleflorida's picture

oh my,... the cost of debt just went up?

EU minus Uk = 3rd largest economy

USA tied with China in 2018...

and the 'big short' has just doubled his bet on the ussa "three`monkey parody de`jour banana republic'...

whilst 'vichy' macron cuts and paste'rate for the 'lady of liberty'?