Strategic observation

Interview: U.S. expert says Moody's decision underestimates China's ability to manage debt risks

2017-05-25 13:53:20 (Beijing Time)


by Xinhua Writers Li Ming, Wang Wen

NEW YORK, May 24 (Xinhua) -- Moody's decision to downgrade China's credit ratings has overlooked the fact that China's economy-wide leverage risks are completely manageable, a U.S. expert has said.

The rating agency on Wednesday lowered China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.

The company attributed the downgrade to the potential increase of China's economy-wide leverage over the coming years.

It added that China's planned reform program is likely to slow, but not prevent, the rise in leverage, and sustained policy stimulus will contribute to rising debt across the economy as a whole.

Brad Setser, a senior fellow at the Council on Foreign Relations, said on Wednesday that China's ample foreign reserves, minimal foreign debt and considerable household savings could provide enough capacity for the country to handle its debt from home and abroad.

"It is important to recognize that China's external balance sheet remains quite strong," Setser told Xinhua, adding that the country's 3 trillion-U.S.-dollar foreign reserves "easily" cover all external borrowing of government, its banks and firms.

Moody's estimated that China's debt-to-GDP ratio would increase to 40 percent in 2018 and closer to 45 percent in 2020.

The U.S. economist, however, believed that China could take control of its internal debt risks thanks to the high level of its domestic savings.

"China's central government debt is quite low, and even if you add in the local government debt... total government debt is modest for an economy that saves as much as China," said Setser, a former Treasury official specializing in China's finances.

His words echoed the fact that China's government debt ratio was 36.7 percent in 2016, well below the 60-percent warning line of the European Union and lower than those of other major developed or emerging economies.

China's Ministry of Finance has said that it is unlikely the ratio would change drastically in 2018-2020 as predicted by the rating agency.

The expert pointed out that continuous reform is critical to further stabilize China's overall pace of credit growth.

In the past few years, China has taken steps to manage debt risks, including building early warning mechanisms and debt supervision systems, and completing local government's bond swaps, among others.

Setser noted that apart from the measures above, "bolder efforts to recapitalize and restructure the banking system are needed."

"The recapitalization costs will be significant, but not more than the central government can manage," he said.