China’s Credit Rating Lowered

When most of us check our credit rating, it will go up or down a little every couple of months.  That always seems like a mystery given the FICO formula for computing such a thing.  But, for governments, the equivalent is the rating by ratings institutions not related to Equifax, Transunion, or Experion.  Countries get their rating from Standard and Poors, Moodys, and Fitch Ratings.  Standard and Poors became the last of the three to lower China’s rating by making it drop from A+ to AA-,  a mystical rating that makes all countries sound pretty good.  The Guardian has an article that shows the ratings for most countries and describes how they are labeled by the three agencies. There are a few, like Libya, that are not rated.  That would not be good if you were selling national bonds.

China’s went down in the S&P, which would be big news if the other two had not already lowered the rating - Fitch lowered it in 2013.  S&P was the last to lower it, and one might ask what took them so long?  It seems that China’s debt is going up relative to its output of goods and services, which by S&P standards has reached a level that forces a downgrade.  They do see the situation getting better in the near term, but longer term debt will continue to rise.  But, if China is like us, they will look at the number and say, “maybe we need to do more to get that back up”.  It is corporate debt that is the problem.  To make their quotas, they have had to borrow more, and they are not selling more to compensate for that.  Since so many companies are state-owned, that reflects on the government ratings.  This is where being a state-owned company causes China some difficulty.  If they cut back on loans, they risk failure of some state-owned businesses.  They prefer to prop them up, something that should also figure into their credit rating.  Their debt is national debt, not just corporate debt.  The Chinese like to say that they are “just like us” in business.  Maybe not so much.