Downgraded China Doth Protest Too Much

Moody’s recently downgraded China’s credit rating from Aa3 to A1, on expectations that the country’s debt stock—already over 250 percent of GDP—will rise further with slowing potential growth. Chinese officials condemned the decision as “absolutely groundless.“ Yet as the graphic above suggests, Moody’s is, if anything, being charitable. Investors are already demanding a higher real yield on China’s 10-year government debt than on the debt of those countries rated at both its old and new levels, meaning that the market is more wary of Chinese debt than is Moody’s. And indeed, rating agency downgrades typically lag reality—as analyses like this and this have shown. In short, it would seem that China doth protest too much.