Moody’s Downgrades China, Time to Buy

Moody’s Downgrades China, Time to Buy

Moody’s Downgrades China, Time to Buy

Yes Moody’s. the firm that kept Enron’s investment-grade rating and did the same for Lehman Brothers has issued a very questionable downgrade of China. The justification for the downgrade is excessively pessimistic and not in line with the ratings they have on other countries.

If they were to apply the same logic in the justification of the rating to the USA then the USA would have to be rated as junk. The same junk rating would most certainly have to apply to the EU as well.

When you consider the relative positions of Moody’s on China and Europe the downgrade becomes laughable. Slowing Growth, Massive Debt are a bigger issue in Europe and the USA then in China.

Moody’s said growing leverage in China prompted the downgrade, and warned about slowing economic growth. China’s massive debt been at the center of concerns among economists and Beijing in recent months, and has rattled global financial markets since late last year.

“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,” Moody’s said in a statement.

Moody’s China downgrade would probably not have a much broader spillover impact on global financial markets, their credibility however is in question.

China’s economy grew at an average annual rate of 10 percent from 1979 to 2010. With the country shifting from export-driven growth to an economy powered by domestic consumers, the growth has trended lower since 2010, and the Chinese government declared a “new normal.”

While slower growth is under way, U.S. investment bank Morgan Stanley said in a 118-page report that incomes are rising.

China’s per capita income is now 8,100 U.S. dollars, according to the World Bank. The report said the figure is expected to pass the 12,500-dollar mark needed to reach high income status by 2027 and break out of the middle income trap.

Higher incomes bring about higher consumption, the report noted, estimating China’s private consumer market will reach 9.6 trillion U.S. dollars by 2030 and account for 47 percent of GDP.

Accelerated consumer and industrial prices growth indicates nascent inflationary pressure on the Chinese economy, despite the good start to 2017.

The consumer price index (CPI) rose 2.5 percent year on year last month, fractionally above market expectations of 2.4 percent and the strongest in two and a half years. Meanwhile, industrial inflation expanded even faster, with the producer price index (PPI), which measures costs of goods at the factory gate, hitting an over-five-year high of 6.9 percent.

As China’s central bank has shifted to a prudent and neutral monetary policy, it will likely be more careful in balancing its multiple goals.

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S. Jack Heffernan Ph.D. Funds Manager at HEFFX holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.