Moody's Upgrades The People's Republic

Douglas A. McIntyre

Two days ago, a major Chinese credit rating agency downgraded US sovereign debt. The reasons were that deficits and the national debt were too high, and growth was too slow.

Today, Moody’s a US-based agency, upgraded its rating on sovereign Chinese paper just ahead of the G20 conference. It is another sign that the People’s Republic goes to the meeting with its strength on the rise. That could also mean trade partners and enemies of its “manipulation” of the yuan will use the information to point to China’s tremendous capital leverage. It is power that the central government has used to undermine the ability of its trading partners to improve their balance of trade with China and gain additional access to its markets.

Moody’s Investors Service upgraded the Chinese government’s bond rating to Aa3 from A1 and is maintaining its positive outlook. That means another upgrade could be in the offing.

The reasons for the upgrade contrast the reasons for the downgrade in US paper.

1. The resilient performance of the Chinese economy following the onset of the global financial crisis, and expectations of continued strong growth and macroeconomic stability over the medium term.

2. The government’s quick, determined and effective stimulus program, the unwinding of which has begun.

3. The lack of erosion in central government financial credit fundamentals, and the likely containment and effective management of prospective, contingent losses arising from the extraordinary credit expansion in 2009.

4. The exceptional strength of the external payments position which provides a substantial buffer to global financial market turbulence and that China’s capital controls will help stem de-stabilizing capital inflows.

5. The expectation that trade and currency regime tensions will be constructively managed between China and the US.

China has already benefited from its long-ago decision to control its economy centrally and its bank system with an iron hand. These things will never be part of a democracy, but there may be some aspects of its policies that the US government should consider. China is willing to put its economic health over the immediate needs of its current generations. That may be what drives the People’s Republic’s GDP growth while the US languishes.

Douglas A. McIntyre