Five views on Moody’s downgrade of China

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Jim Veneau, Axa IM‘s head of Asia fixed income, Aidan Yao, senior emerging Asia economist, and Honyu Fung, senior portfolio manager at the firm, expect that the downgrade will have a limited impact on China’s fixed income market as well as individual bond issuers’ ratings.

“Given [various] tentative improvements and a clear intention by the government to control financial risks, we find the timing of Moody’s decision somewhat surprising,” they said in a commentary.

“The combination of current actions on financial deleveraging and long-term hopes on structural reforms is supportive to our cautiously constructive view on China, and is perhaps the key reason why Moody’s has placed China on outlook stable after today’s rating cut.”

The effect on the onshore bond market is likely to be negligible as onshore participants indicate they pay limited attention to Moody’s or other rating agencies, they noted.

For hard currency Chinese credits, “Chinese investors are large holders and represent the likely demand for Chinese credit, so expect them to remain unfazed by the downgrade and to be the probable bidders”, they continued.

“There may be some rating impact on state-owned enterprises, but it should be case by case and not necessarily a matching one-notch downgrade.”

However, there might be some selling in some global Chinese credits such as the internet and oil companies.

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