Talking Points:
- Moody’s has unexpectedly cut China’s credit ratings
- It sees no cause for alarm but expects waning potential growth, increased debt/GDP levels
- Commodity currencies did not care for this at all
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Commodity-linked currencies got a fright Wednesday as credit-rating agency Moody’s downgraded China.
The country now ranks A1, down from AA3. Its outlook is stable. Moody’s said the change reflects expectations that China’s financial strength “will erode somewhat” in the coming years.
Although growth will remain high compared to other sovereigns, Moody’s judges that potential growth is likely to fall. It expects growth to fall to 5% annualized over the next five years, from around 6.5% now. Moody’s also expects an increase in the government’s debt burden as a percentage of Gross Domestic Product.
All up this downgrade only burnishes the widely-held market view that China has had all the “easy” economic growth it can expect, possibly and then some. Major growth gains are still possible, but they will be harder to win and will depend more on the ingenuity and diplomatic skill of Beijing.
Both the New Zealand and Australian Dollars took a hit after the announcement. This is utterly unsurprising given China’s vast links to the commodity export story on which both to different degrees depend. Central banks in both countries have been known to fret publicly that some of the external factors which have recently flattered economic performance might be temporary.
Moody’s action suggests that the boost either can expect from Chinese growth may fade, even if it there is little prospect of it vanishing.
--- Written by David Cottle, DailyFX Research
Contact and follow David on Twitter: @DavidCottleFX
