Chinese stocks and the yuan initially slumped on Wednesday after credit rating agency Moody’s Investors Service issued its first downgrade of China’s debt since 1989. Moody’s concerns about China’s mounting debt load may have spooked investors, but there are still plenty of reasons to be bullish on China stocks and funds in the long term.
Moody’s said it is anticipating a “material rise” in China’s overall debt levels in coming years and has downgraded China’s credit rating from Aa3 to A1. China’s outstanding debt level has ballooned from 160 percent of GDP in 2008 260 percent of GDP in 2016.
China was quick to respond to the downgrade, calling the ratings cut “absolutely groundless.”
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After initially dropping by 1.3 percent in afternoon trading on Thursday, China’s Shanghai Composite index closed down up 0.1 percent after investors dismissed the downgrade.
U.S. investors also seem to see the ratings downgrade as a non-event for Chinese stocks. The iShares FTSE/Xinhua China 25 Index ETF (ticker: FXI), which invests in 25 large Chinese companies, finished the day mostly flat on Thursday. Large-cap U.S.-listed Chinese companies Alibaba Group Holding ( BABA) and Baidu ( BIDU) were both down less than 1 percent.
“I don’t think it’s going to be earth-shattering or shift investors’ sentiment toward China,” CIMB economist Song Seng Wun says of the downgrade. “Everyone on the planet has flagged the risk of Chinese debt and the risk associated with the current policymakers’ strategy and attempt to deleverage.”
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U.S. investors of Chinese stocks have chosen to mostly ignore China’s mounting debt and focus on its impressive growth numbers. China’s economy expanded by 6.9 percent in the first quarter of 2017, while the U.S. economy grew by just 0.7 percent.
A 2016 report by Boston Consulting Group highlights the incredible long-term growth potential in China, which is already the world’s second-largest economy.
“By 2020, the number of [upper-middle class] and affluent households will have almost doubled to about 100 million and will account for 30 percent of the urban population,” Boston Consulting Group analyst Jeff Walters says in the report. “The spending intentions of this group remain constant, and the spending growth rate is rapid, at 17 percent.”
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After fears over China’s debt problems triggered a major market sell-off in early 2016, Chinese stocks have rebounded and delivered strong returns in the past year. The FXI ETF is up 25.1 percent over the past 12 months.
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Investors Shrug Off China Credit Downgrade originally appeared on usnews.com
