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Macroscope | Are credit rating agencies right to be bullish on China’s economy?
- Investors are turning bearish on the Chinese economy, amid expectations that the zero-Covid policy might persist well into next year
- Yet the big three credit rating firms still see reasons for optimism in the middle to long term
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The downward revisions to forecasts for China’s GDP growth this year are coming fast and furious. In July, the International Monetary Fund slashed its estimate to just 3.3 per cent, more than a full percentage point less than it had predicted in April.
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Some investment banks are more downbeat. Last month, Goldman Sachs lowered its projection to 3 per cent. Nomura, the most bearish of the lot, cut its gross domestic product estimate to a meagre 2.8 per cent, half the target set by Beijing in March, which is already the lowest in three decades.
Worryingly, in a report published on September 2, Nomura said Beijing’s uncompromising zero-tolerance approach to the Covid-19 virus – the policy that is wreaking the most damage on the economy because of the imposition of draconian citywide lockdowns – would persist until at least March 2023 and would be relaxed at a slower pace than previously envisaged.
The “dynamic zero-Covid” policy, coupled with the government’s determination to rein in the excesses of the property industry, has made it extremely difficult for policymakers to restore confidence in the economy.
The CSI 300 index of Shenzhen- and Shanghai-listed stocks has lost 30 per cent since its peak in early February 2021, leaving it just 11 per cent above its nadir in March 2020 when the pandemic erupted. Outflows of foreign capital from China’s bond and equity markets have persisted for six straight months, contributing to a 9.4 per cent fall in the once-resilient yuan versus the US dollar since mid-April.
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Yet, despite the dire predicament facing China’s economy and financial markets, the most important assessors of countries’ creditworthiness remain relatively sanguine. The leading credit rating agencies have kept their sovereign ratings and outlooks for China unchanged for at least the past five years.
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