China's credit rating downgrade underlines need for authorities to keep preventing Chinese from investing their savings overseas, Asia expert says 

The louder alarm bells are rung over rising debt and slowing growth in China, the more important its capital controls become, says the BNZ Chair in Business in Asia at Victoria University.

Professor Siah Hwee Ang says Moody’s downgrade of China’s credit rating underpins the importance of Chinese authorities continuing to prevent people from spending their money abroad rather than within China.

Moody’s last week downgraded China’s long-term local and foreign currency issuer ratings for the first time in 28 years, by one notch to A1 from Aa3. (See credit ratings explained here).

It said: “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt [at nearly 260% of GDP] continuing to rise as potential growth slows.

“While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government.”

Capital controls here to stay

Speaking to interest.co.nz in a Double Shot Interview, Ang says that with 40% of Chinese incomes saved, the country’s banks have wealth management products totalling 30 trillion yuan (NZ$6.2 trillion).

The worry is that “people don’t spend money much in China, but when they go abroad, they buy property and everything”.

Ang says the capital controls, which were intensified at the beginning of January, are therefore essential in ensuring this money is released internally.  

“They are there to stay for a while, and more and more criteria is being placed on what you can bring money out of China for.

“The banks are being watched as well. The banks have been warned that they must not relax any criteria. And in fact, beyond a certain amount of money, everything has to be signed off by the central bank.”

China’s outbound direct investment dropped 71%, from NZ$28 billion in April last year to NZ$8 billion in April this year.

And this is being felt in New Zealand. Interest.co.nz’s Greg Ninness noted “Chinese buyers were notable by their absence” in Auckland’s real estate auction rooms in May, and the Real Estate Institute of New Zealand’s (REINZ) sales figures reflect a drop off too.

The number of residential properties sold in April dropped 32% from March, and 31% from April last year.  

Median prices fell in 11 of the REINZ’s 16 regions around the country, with the biggest fall experienced in Auckland. The median fell 5.6% from its record high, but remained 3% higher than in April last year.

There are of course other factors influencing the market; the 40% deposit requirement for residential property investors introduced by the Reserve Bank last year, certainly being significant.   

Impact of downgrade ‘tempered’

Ang doesn’t believe Moody’s decision to change China’s credit rating has been triggered by a particular event or change in circumstances.

Rather, he says Moody’s is “moving with the reality” and making the necessary adjustments for the investors and others who rely on its ratings.

“It’s not news to us. It’s probably predicted about five years ago.”

Ang therefore believes the impact of the downgrade is “pretty tempered”.

Expectations need changing

At the heart of the matter, he says China’s high growth rate is simply unsustainable.

“We don’t expect America to be growing at 5% anyway. America’s been growing at about 2%.”

We therefore should expect China’s annual GDP growth to slow from 6%, to 5% and 4%, Ang says.

“We expect that to happen and we actually want them to spend more money and time on reforms. There’s no way to constantly just grow without doing the reforms. It’s very unstable as an economy.”

Ang says over the past year Chinese officials have flagged the fact that the world can’t rely on them to keep contributing a third of the world’s economic growth.

“That’s quite stressful.”

Yet he acknowledges the political challenges of accepting slower growth, given the power struggle between China and the US for the dominant position on the world stage.

“They should be allowed to grow slower. But I think they are also trying very hard to please everyone by growing faster and faster and trying to maintain that six-point-something growth, which I think is going to be tough over time.”