Moody’s downgrades China, warns of fading financial strength as debt mounts
Moody’s Investors Service downgraded China’s credit ratings on Wednesday for the first time in nearly 30 years, saying it expects the financial strength of the economy will erode in coming years as growth slows and debt continues to rise. The one-notch downgrade in long-term local and foreign currency issuer ratings, to A1 from Aa3, comes as the Chinese government grapples with the challenges of rising financial risks stemming from years of credit-fuelled stimulus. “The downgrade reflects Moody’s expectation that China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” the ratings agency said in a statement, changing its outlook for China to stable from negative. China’s Finance Ministry said the downgrade, Moody’s first for the country since 1989, overestimated the risks to the economy and was based on “inappropriate methodology”. “Moody’s views that China’s non-financial debt will rise rapidly and the government would continue to maintain growth via stimulus measures are exaggerating difficulties facing the Chinese economy, and underestimating the Chinese government’s ability to deepen supply-side structural reform and appropriately expand aggregate demand,” the ministry said in a statement.
Brightening euro zone economy keeps upward pressure on bond yields
Euro zone government bond yields nudged higher on Wednesday as the improving consumer sentiment in Germany was viewed as the latest evidence that a brightening economy may encourage the central bank to wind back ultra-easy monetary policy. Yields across the bloc have not yet strayed too far from record lows breached in recent years as the ECB spent trillions of euros on an asset purchase scheme and cut interest rates deep into negative territory. But with that scheme set to expire in December and investors pricing in the chance of rate increases from early 2018, it is becoming an uneasy truce between markets and policymakers. “The more we see upside surprises on growth, the more the ECB could justify removing some of the stimulus slightly earlier,” said Mizuho’s head of euro rates strategy Peter Chatwell. German 10-year yields climbed as much as 2 basis points to 0.43 percent on Wednesday. Analysts said that a sale of 10-year bonds from Germany was also adding upward pressure to yields as investors tend to trim portfolios ahead of new supply. Most other euro zone yields were flat or slightly higher on the day.
Fed could intervene in bond run-off as needed: Harker
The Federal Reserve is still discussing options for shrinking its $4.5-trillion bond portfolio and, once that begins, the central bank could “intervene” in the process if necessary, Philadelphia Fed President Patrick Harker said on Tuesday. “If something happens, of course we’ll intervene, but we fundamentally want to push the start button and leave it to churn slowly away,” Harker said at a Market News International conference. “We’ll still discuss the balance sheet in (regular policy) meetings, but if things are good, we’ll leave it to gradually unwind in the background.” The comments largely reflect both Harker’s and most other Fed officials’ stated approach to shedding bonds, a plan that has been partially announced even while investors eagerly await details on the pace and sequence with which the balance sheet will shrink. The Fed amassed the assets to spur economic growth in the wake of the 2007-2009 recession and financial crisis. Harker, a centrist who votes on monetary policy this year under a rotation, added: “There are different options under discussion.” He also repeated an expectation for two more interest-rate hikes, and to begin shedding the bonds, this year.