China: Marginal impact from Moody's decision to cut credit rating - BBH

The analysis team at BBH points out that the main development today was Moody's decision to cut China's credit rating to A1 from Aa3 as it cited the risk of a material rise in economy-wide debt levels as the economy slows.  

Key Quotes

“The outlook was shifted to stable from negative.  It is Moody's first downgrade of China since 1989.  Our own sovereign ratings model has China’s implied rating at A+/A1/A+.  We have been warning of downgrade risks from S&P (AA-) and Moody’s, but Fitch’s A+ appears to be on target.”

“The impact was marginal.  In part, this is due to the exaggeration of the internationalization of China.  Specifically, China's external debt is low at around 12% of GDP.  The PBOC estimates that foreign investors owned about CNY830 bln (~$121 bln) of mainland bonds at the end of March, compared with CNY853 bln at the end of 2016.  That is equivalent to about 1.5% of the CNY63.7 trillion outstanding.”

“Chinese shares initially weakened but recovered and closed fractionally higher.  The price of industrial metals fell, but it is difficult to say the downgrade was the spur.  Iron ore fell 4%, for example, after falling 3% yesterday.  Nickel fell 1.7%, while copper slipped 1%.  Among the currencies, the Australian dollar and the Malaysian ringgit seemed to be the most sensitive, but both recovered fully.”