China Takes Aim at Moody's After Rating Downgrade

By Shen Hong Features Dow Jones Newswires

Moody's Investors Service is facing a backlash in China against its decision to cut the country's credit rating, a move that has come just as foreign ratings firms are set to receive greater access than ever to the world's No.2 economy.

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China's Finance Ministry immediately criticized the Moody's downgrade--its first such move in nearly three decades--accusing it of using an "inappropriate" methodology and betraying "a lack of necessary knowledge of Chinese law." The U.S.-based rating firm had cited concerns about rising debt as China's economy slows as the main reason for its downgrade.

In an article published on Wednesday evening, China's official Xinhua News Agency criticized Western rating firms for discriminating against developing countries. "Their methodologies are flawed and their reputation has already been questioned," Xinhua said.

And on Thursday, the state-run People's Daily's overseas edition ran a column written by Mei Xinyu, a well-known economist at China's Ministry of Commerce, in which he accused Moody's of applying "double standards" to its rating of China versus that of Western countries.

In response to Beijing's criticism, Moody's reiterated the rationale behind its latest rating decision in a written reply to The Wall Street Journal, citing expectations for slowing economic growth and increased reliance on debt-driven policy stimulus.

Other countries facing credit-rating downgrades are often critical of the firms responsible. When Standard & Poor's cut the U.S. government's debt rating to AA+ from triple-A in 2011, the Treasury Department complained about what it called a $2 trillion error in the rating firm's math.

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In calibrating its response to Moody's, Beijing must weigh its desire to push back against the downgrade with its simultaneous efforts to encourage more foreign investors into its $8 trillion bond market. Last year China relaxed many of the restrictions foreigners faced on investing in Chinese bonds, while the government is currently planning to launch a bond-trading link between the mainland and Hong Kong.

Granting major ratings firms greater leeway to operate in China has long been seen as a crucial step in the bond market's opening, as it should help improve investor confidence. Local firms that currently dominate ratings in China, are often criticized for their leniency: The vast majority of China's corporate-bond issuers enjoy an investment-grade rating of at least above AA, making it difficult for investors to discern different issuers' creditworthiness.

Beijing has said it will allow foreign firms to provide credit-rating services in China by July 16, as part of a plan agreed at the summit between President Donald Trump and Chinese President Xi Jinping at Mar-a-Lago, Fla., in April.

It's too early to say whether, as a result of its downgrade, Moody's will face problems growing in China once the market opens up. Many of the companies that issue bonds in China are state-owned, meaning the government could in theory press firms not to pay out-of-favor agencies for ratings.

"As a general matter we are encouraged by the policies of the Chinese Government to open the Chinese Capital Markets, including to the CRA [credit rating agency] industry," Moody's said in its reply to the Journal.

Analysts say it will be hard for China to punish Moody's without harming its reputation among investors.

"These [foreign ratings firms] are big boys and if China did that, that would be evidence of a too-thin skin," said Tim Condon, an economist at ING in Singapore.

Still, the backlash in China against Moody's in the 24 hours following its downgrade is reminiscent of what happened in March last year, when the firm lowered its outlook on China to negative from stable.

At that time, aside from similar criticisms in state media, China's vice finance minister, Zhu Guangyao, accused the ratings firm of acting under "ideological influences" and treating emerging economies unfairly. Behind the scenes, Chinese regulators on a couple of occasions dropped Moody's from the guest list of meetings with external agencies in the months following, according to a person familiar with the matter.

"At times, if your rating is lower than your industry peers, you could also end up with less access to official data, for example," said an executive from another international rating agency.

Ratings-firm executives say their longer-term worry is about how to operate in a country where ratings standards diverge from those in other major countries.

"We actually still have no idea how to approach this thing, because the local agencies' rating criteria are totally different from ours," said the executive from another international ratings firm. "You can't have two different sets of rating standards in the same market. Investors will be more than confused."

In one illustration of the ratings discrepancies that could emerge, China Chengxin Credit Management Co., a local Chinese firm that is 30%-owned by Moody's, kept its sovereign-debt rating for China at AAA this week. A Moody's spokesman said the company doesn't have any representative on the joint venture's rating committee.

"Domestic rating agencies are definitely more relaxed than their foreign peers and that's partly why most institutional investors here always conduct their own risk analysis before making any investment," said Wang Ming, a partner at Shanghai Yaozhi Asset Management Co., a bond fund that manages 2 billion yuan ($290 million) in assets.

Write to Shen Hong at hong.shen@wsj.com

(END) Dow Jones Newswires

May 25, 2017 08:06 ET (12:06 GMT)