Comments on Yiping Huang, Peking University, “Is a Chinese sovereign debt default likely?”, 28 May 2017
This post raises a number of interesting questions.
Firstly, about the argument of that the recent downgrading of China’s credit rating by Moody’s “could turn out to be more a warning of past problems than a prediction of future risks”. One can certainly argue one way or another on this particular rating by Moody’s, but did Moody’s change its methodologies in this specific case? Unless it actually did or it made some errors in the process, one should probably accept the rating or the approach. Certainly, one could argue whether its general approaches or methodologies are effective and reflective of future outlook or current status, but that is a quite different point. Having said that, it is inevitable that actions and reactions will occur regardless of the actual merits of the rating, particularly when it is a negative rating of China’s outlook or credit.
Secondly, does this downgrading in rating really and necessarily mean significantly heightened risks of a default of sovereign debts by China? That is likely to be a very long distance to bridge. A default means its inability to pay its debts at the time when they are due. It is largely a ‘cash flow’ issue and a ‘cash management’ issue. Does or will China realistically face this kind of scenario in the near future covered by the rating period, that is, its current assets/revenues fall short of its current liabilities? I would be extremely surprised to see that occur.
Thirdly, in the third reason that the author explained for why China’s money supply to GDP ratio is high, it is said: “And third, there is an inherent acceleration mechanism in China’s monetary policy. The money supply expands in good times in order to facilitate an increase in economic activity, but it also expands in bad times to stabilise the economy and the market.” Does that mean China’s money supply always accelerates, that is, both when the economy is expanding quickly and when it is in trouble in maintaining steady growth? If that is true, then isn’t that also one of the main reasons for its high money supply to GDP ratio?
Fourthly, it is said that there are not as many investment opportunities in China as in other countries (presumably industrialised countries), and that, limited opportunities for people to invest, have led to financial problems moves from one area to another in China. Why could China develop more investment opportunities or markets? What have been the main impediments to the development of more investment opportunities?