Giving China Credit

Is China a triple-A credit?

Many people think so. China’s economy has surpassed Japan’s as the second largest in the world, it’s growing at 10% per year, and it has currency reserves equal to ¾ of its economy. By contrast Japan’s economy is stagnant, they have a net debt level about equal to their GDP, and their aging electorate seems vote for a new prime minister every year. But the rating agencies have them both notched at AA-.

Some folks think that China is being disrespected here. They think that China’s net creditor status should give it a better rating than many Aaa countries. Indeed, in the markets today writing a guarantee for China’s debt is cheaper than writing one for Austria, France , or Italy. Austria, by the way, has a 50% debt/GDP ratio, 4% economic growth, a 3% budget deficit, 2% inflation, and 6% unemployment. It’s not a fiscal basket case.

But the market is judging China’s debt to be safer than many core European countries because of its growth and trade surplus. But there is a matter of transparency, continuity, and rule-of-law. China unquestionably is a growth dynamo. But this has come in part via an unreported credit expansion. Many of China’s banks will be saddled with bad loans as a result.

This doesn’t mean that China is going to crash. Their currency reserves almost guarantee that they won’t. But reserves can be squandered; and growth can be volatile. In evaluating China, it’s important to note that while dragons may be able to fly, they also can burn you.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By |2014-09-11T11:07:44+00:00July 18th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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