Moody’s Cuts China’s Outlook to Negative

So what the Chinese gov’t have squandered an astounding $762 billion in forex reserves over the past year. Chinese stocks are moving higher this evening, up more than 4%–dispatching Moody’s downgrade with ease.

Without credible and efficient reforms, China’s GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavorable. Government debt would increase more sharply than we currently expect,” Moody’s said.

The agency said its rating committee had discussed China’s status at a meeting on Feb. 9, during which the country’s institutional and fiscal strength, as well as its susceptibility to event risk, were reviewed.

The agency said the downgrade was driven by expectations that China’s fiscal strength will continue to decline, as well as the fall in its foreign exchange reserves which have shrunk by $762 billion over the last 18 months.

It also said that policymakers’ credibility was at risk of being undermined by incomplete implementation or partial reversals of some reforms.

“Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty about policy priorities,” Moody’s said.
Moody’s, however, retained China’s Aa3 rating, noting the country’s sizeable reserves gave it time to implement reforms and gradually address economic imbalances.

Eventually all chickens will come home to roost. But for now, the monster has been put back into the closet. War is being raged against fear. The very survival of the status quo depends upon the stability of world equity markets.