China’s downgrading – motivated or not?

May 24th, 2017

Moody’s has finally downgraded its rating for the People’s Republic of China from Aa3 to A1. For certain people this may have been a surprise, for others not. Anyway, the Chinese certainly do not like this step after all their strong efforts to receive international recognition in the past few years in financial areas as well.

Moody’s motivates the downgrading by mainly pointing at China’s increasing debt problem (private and governmental) and the worsening outlook for China’s GDP growth. This may be two justified assumptions but they are not necessarily interlinked. The central and particularly the local government-debt problems are well known. On this page and in many more extended pieces I have been singling out myself the lagging transparency of the Chinese debt structure and volumes. Now China has to pay a relatively high price for these long-lasting shortcomings, leading to (somewhat) higher funding costs and declining credibility on financial markets.

As regards the other motivation of the downgrading, I do not quite share the view of Moody’s that economic reforms really are moving too slowly. This may be the case – but can we be sure? The Chinese reject such an argument. They may be right. But if Moody’s has committed an error, such an incorrect interpretation may also be based on insufficient transparency by the Chinese. Obviously, Moody’s has already concluded that economic reforms are not strong enough – at least so far.

Again: Moody’s may be right – or not. We still do not know. Because one conclusion can be made for sure: China’s growth has indeed to come down if successful economic reforms shall be implemented to a satisfactory extent. Maybe we can learn more about this during the important National Congress of the Communist Party this fall where a number of new, very important leaders of the Standing Committee of the Politburo will be selected (but not the Chairman and the Prime Minister).

Improving transparency and the quality of statistics would be good answers to the shrinking credibility of China on global financial markets – and, of course, even more important – that decisive economic reforms really take place.

Today, it’s hard to say whether Moody’s downgrading was premature or not. However, it may serve as a warning signal for the political leadership in China. An accelerated and more efficient economic reform process is still possible! And if analysts in Western countries really have not underestimated progress in Chinese economic reforms, better transparency for Westerners certainly would be an appropriate answer.


Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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Growth temperature rises in the Chinese economy to 6.4 in April – up from last December

May 11th, 2017


From the end of April until the beginning of May, we prepared our traditional spring survey on the business climate and economic conditions in China. We try to find out more about the Chinese business cycle and some important structural issues.  We received again answers from around 15 independent China experts from Asia, the U.S. and Europe – thanks!

¤   Our so-called Temperature Indicator for the Chinese economy improved to 6.4 in April/May compared to 5.2 in December last year (on a scale 1-10; 10=very hot).

¤   The panel expects GDP growth in 2017 and 2018 to remain quite stable compared to 6.7 in 2016 (2017: 6.5 %, 2017q4: 6.3 %, 2018:6.0 % – based on official statistics).

¤   The panel’s GDP forecast on China for 2017 and 2018 includes the assumption of an ongoing gradual but relatively modest upswing in the OECD area as a whole.

¤   75 % of the panelists have rather a downward bias in their forecasts than vice versa.

¤   There are almost no appreciation expectations anymore for the Chinese currency RMB.

¤   90 % of the panelists still see a bubble on the real estate market.

¤   Ranking of some structural areas in China (scale 1-10, 10 = very good): statistics 3.9, institutions 5.3,  marketization of a) banks 4.1, b) stock markets 4.0, c) bond markets 4.4.

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Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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Europe’s chance in China

April 7th, 2017

President Trump met most recently his counterpart in China, President Xi Jinping. Regardless what the outcome of these meeting really turns out to be,Trump has not started up his relations with China in a friendly way. That’s certainly how the Chinese feel right now.
One may mention, for example, that Trump has accused China of
– of conducting unfair trade policy,
– of manipulating its currency,
– of having “invented” the global environmental crisis,

Furthermore, China has criticized Trump for his verbal support of Taiwan.

There is no doubt that the EU and a number of EU countries could benefit from these Chinese-American tensions. China indeed would like to enlarge its relations with Europe and European companies.
But China would also like to see a more reforming and harmonizing EU. My impression from visits to China and from talks with the Chinese is without doubt that they consider the EU as an underperforming institution with serious efficiency problems (which certainly is the case to a high extent).

China also dislikes some possible protectionist EU action caused by governmentally subsidized Chinese acquisitions in the EU. It is, however, remarkable that already 2500 Chinese companies can be found in Germany (source CHKD Germany) – mass entrepreneurship not only in China but also to some extent outside China, e.g. in Germany.

The conclusion of these reflections is that internal improvements of the kind described above would be good for the EU itself, Sweden included, but also for relations and business of the EU with the rest of the rest of the world – particularly with the economic giant of China, the largest economy at some point in the (foreseeable) future.
The EU should take this chance now!

Hubert Fromlet
Affiliate Professor at the School of Business and Economics, Linnaeus University
Editorial board


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