What might be the fallout from last week’s move by Moody’s to cut China’s credit rating for the first time since the 1980s? Not much, for now and maybe not for later.
True, the Moody’s downgrade may not be all that much of a surprise (markets shuddered and then rebounded), and the rating was taken from Aa3 to A1. But the general tone is a negative one, as it shows the expectation that borrowers, who have been taking on more debt, are going to have a hard time meeting that debt burden (which will of course become harder to do as that burden increases. This is the opposite of a virtuous cycle).
That debt burden stems from a long-lived move by the government in the wake of the 2008 financial crises that saw the country adopt a flurry of public works, building all manner of tangible items from highways to buildings. But amid the downgrade, with the forecast by Moody’s that economic growth will slip to five percent over the next few years (down from a roughly seven-percent pace not long ago), with debt to be more than 40 percent of GDP over the next few years, sustaining any new infrastructure projects on a large-scale basis will be more expensive (as rates charged on debt will go up amid the attendant perception of higher repayment risk).
Tough sledding, then, for luxury hotels, retailers and the like, who go for upscale developments (and financing them on the cheap, historically speaking), on the assumption that if you build it, they will come … and spend.
The key here is that a slowing economy hits really just about all sectors, but some will weather any hiccup better than others, and consumer spending may be a relatively bright spot. The growing middle class may grow antsy at a slowdown. But it may not. Consider the fact that international companies such as Burberry (and not just Chinese firms) have seen growth in China, and have committed to spend time, money and development effort there. The long-term trend is intact.
And even around the timeframe that the Moody’s downgrade happened, Bloomberg was reporting that different data points and reports put numbers to the claim that disposable income has in fact been underestimated, with the Chinese Academy of Social Sciences (OK, it is based in Beijing) reporting that government estimates of disposable income may be 20 percent lower than the reality because of sampling error. Part of the reason is that many households are enjoying the effects of positive streams of investment income (that itself may be a warning sign, of course).
Separately, private estimates of consumer confidence via the National Bureau of Labor Statistics show an optimistic outlook, with inclinations to spend, as surmised by a 110 reading in the first quarter of 2017, compared with a 108 reading at the end of last year. Spending internationally (that means Chinese consumers spending abroad) has picked up in the last couple of quarters, after being negative earlier in 2016, and where positive growth was five percent in the third quarter and 15 percent in the fourth quarter of that year. Looking closer to home, consumption spending, which is consumer and government spending, was three-quarters of economic growth for the country in the first quarter of this year. The wallets are still opening on the grand stage, and are likely to continue to stay open.