Chinese Finance Ministry: The problems of Chinese debt are overestimated

Beijing in defensive mode after Moody's downgrades its credit rating. The problems are falling growth and rising state debt to 260%. Economic reforms needed, but impeded by Party’s fear of losing power and increasing social tensions. China maybe set for economic disaster.  


Beijing (AsiaNews / Agencies) - "The Moody’s downgrade is based on an inappropriate method … It overestimated the difficulties faced by China and underestimated its ability to deepen structural reform and moderately expand overall demand,”.  This is the Chinese Finance Ministry response today to the move by Moody's agency that yesterday downgraded China's credit rating for the first time since 1989.

The agency lowered the rating by a point: from Aa3 to A1. With this tiny move, Moody's is expressing its concern that the Chinese economy will slow down even more in the coming years, and it will be more difficult for Beijing to be able to borrow and cover the costs of its debt.

The agency points out that the country's growth rate is falling (6.7 in 2016, 6.9 in 2015), while the state debt is climbing up to 260 percent of Gross Domestic Product.

The major part of this debt is concentrated on state industries, marked by overproduction, with no focus on market demand, whose deficit is covered each year by state banks.

For a long time, many economists have asked China to reform these ("mammoth") industries and to boost domestic consumption by raising the wages of the working population. But such "mammoths" are the basis of economic power for Party members and their children, and an employment basin. The Party fears a restructuring could cause financial loss to some leaders and their families, as well as social tensions due to unemployment.

Moody's move comes just months ahead from the Chinese Communist Party Congress, next October. After the rhetoric of liberation from the Japanese and the Tiananmen massacre in 1989, the Party supported its credibility and legitimacy on the economy and on becoming rich. The disclosure of a "drugged" economy, propped up by state loans and the debt-to-debt coverage of the state, is disapproved of by the leadership.

A few hours after the lower credit rating, Moody's also lowered the rating of 26 Chinese state-owned companies maintaining that the government will not be able to cover their debts.

The companies include China Mobile, China National Offshore Oil Corporation and China Petrochemical Corporation.

Many economists believe that China is preparing for a disaster that could be even worse than the US sub-prime crisis - which spawned the 2008 financial crisis - and the Japanese crisis in the 1990s.