Yesterday, Standard & Poors downgraded China’s debt from AA- to A+. So far, mass panic has not ensued.
Here is a sample of quotes on the matter:
“S&P’s is more of a catch-up rating action. There should not be much impact on credit markets. A+ is still a solid investment grade rating. There is no material information in S&P’s release that the market was not already aware of.” – Neel Gopalakrishnan, senior credit strategist at DBS Group Holdings Ltd.
“The impact on Chinese asset prices will probably be on the upside. Large state-backed funds will probably buy rather than sell Chinese bonds and stocks.” – Ziyun Wang, a founding partner at DeepBlue Global Investment Ltd.
“Largely a non-event from a market perspective. I don’t think it will have an adverse impact on the sovereign issue or on the future borrowing of corporates.” – Todd Schubert, head of fixed-income research at Bank of Singapore.
“Moody’s [which downgraded China to A1 from Aa3 on May 24] was the first mover and we all remember spreads squeezed back in. So S&P just played catch-up to Moody’s and we expect marginal impact on spreads.” – Antonio Cailao, director of Asian credit trading at ING Bank NV.
“The news could read positively in China. Domestic investors may expect the government to release supportive policies to ease any disruption.” – Qin Han, chief bond analyst at Guotai Junan Securities Co.
“Chinese fund managers are likely to sit tight on their positions. It would be a good opportunity to buy on the dip.” – Qiu Zhicheng, strategist at ICBC International Research Ltd.
“Today’s downgrade means one fewer time in the future that China can be downgraded. Bullish!” – Grant’s Interest Rate Observer.
I rather think that last one from Grant’s was sarcastic.
The rationale for the downgrade gets to the heart of the concerns about China’s economy. Said S&P: it “reflects our assessment that a prolonged period of strong credit growth has increased China’s economic and financial risks”.
The report focuses on the banking sector, in which assets now total 243 trillion yuan (US$36.9 trillion), up more than 11% in a year and 300% since 2008.
The size of bank balance sheets is thus more than 3 times GDP of 78 trillion yuan.
The only price to be hit hard by the downgrade appears to be iron ore, which fell 6.3%, having already dropped US$10, or 12.5% since mid-August.
Apart from the impact of this on the Australian economy, and the share prices of BHP, RIO and FMG, it is given some added significance by the crowded commodity futures trade in China.
I use “trade” in the sense of “speculate” rather than “invest”. In fact Grant’s reports that in June the vice chairman of the China Securities Regulatory Commission – their version of ASIC – encouraged wealth management firms to invest in commodity futures, advice they seem to have taken enthusiastically.
As Grant’s wryly observes: “A sovereign debt downgrade? No problem. An ongoing downdraft in metals prices? That might be a different story.”