It's All Negative: What is Moody's doing?

It's All Negative: What is Moody's doing?

After the international credit rating agency Moody's suddenly downgraded the outlook of China's sovereign credit rating to "negative", it took another action and intensively downgraded the rating outlook of 2 regions in Hong Kong and Macau, 26 local government financing vehicles, 8 major Chinese banks such as Agricultural Bank of China, China Development Bank, Bank of China, and Industrial and Commercial Bank of China, 18 Chinese enterprises including Tencent and Alibaba, and 4 state-owned enterprises, and included all 30 enterprises in the "downgrade review" list.

As of December 8, more than 110 Chinese-funded enterprises have been affected, and the scope is still expanding.

Moody's noted that government support for financially distressed entities could become more selective, which would increase long-term risks for state-owned enterprises and local governments.

Is this Moody's second raid?

Yes and no.

Yes - it is indeed not normal to concentrate on such a large-scale adjustment. And China has not been downgraded its sovereign credit rating, but only its outlook. It's like Moody's found that after downgrading China's outlook, no one cared, the matter was not big enough, and he had another wave of "serious impact" to seek attention.

No, when a rating agency changes a country's or region's sovereign credit rating and outlook, it often adjusts the ratings and outlook of companies in various industries in that country. Because it is impossible for the institutional rating of this country or region to be higher than the "general environment".

This is not the first time Moody's has downgraded its outlook for China, or downgraded its rating.

In March 2016, Moody's announced that it would maintain China's sovereign credit rating at "Aa3" but revised its outlook from "stable" to "negative".

In May 2017, Moody's downgraded China's sovereign credit rating from Aa3 to A1.

In 2016, Moody's downgraded the outlook for at least 25 non-insurance financial institutions, 8 insurance companies, 38 state-owned enterprises and 34 municipal infrastructure companies to negative after downgrading China's outlook. 2017 was about the same.

Although this time it is larger, it is not too strange as long as it happens for a reason.

What is the credit rating and outlook?

In the financial market, international credit rating agencies are "third parties", just like third-party institutions that assess housing prices, organizing professionals from all walks of life to evaluate targets such as sovereign countries and regions, various types of bonds, and securities issuers, and rating outlook is a prediction of the future development trend of the target.

Its essence is to assess the risk of debt and reduce information asymmetry in the market.

For the seller (the issuer), the market may not know him, and the price given is particularly low (high interest rate), and the credit rating is equivalent to "third-party inspection", which can reduce his financing costs.

For the buyer, a credit rating allows him to correctly assess the risks and benefits of the target without incident.

For the authorities, credit ratings are equivalent to "free assistants" to maintain market order, reducing the probability of "fraudsters".

For the international credit rating agencies themselves, the correct credit rating can maintain their credibility and attract more rating business for themselves, so as to make a profit.

But ratings from rating agencies are not always reliable.

For example, after the outbreak of the financial crisis in 2008, Moody's maintained Greece's A1 credit rating until 2009 until the outbreak of the European debt crisis.

In 2017, when Moody's downgraded China's rating from Aa3 to A1, China's finance minister countered the case, saying, "... When Greece's debt crisis was so problematic, it was rated higher than China's. ”

Another example is the collapse of Silicon Valley Bank, which was also A1 graded, and buying bonds issued by Silicon Valley Bank was the same risk as buying Chinese government bonds. However, if anyone really buys Silicon Valley Bank's corporate bonds, it will be considered "half a foot in the Ghost Valley".

It's All Negative: What is Moody's doing?

Why did Moody's make a move?

Last month, Moody's dared to move the "cheese" of the United States, downgrading the outlook of the U.S. sovereign rating from "stable" to "negative". This month, Moody's dared to touch China's "cheese". Why did it make a move?

At present, most of the media is focusing on China's economy, questioning Moody's judgment is flawed.

So why don't we think from Moody's point of view?

(1) From 2016 to 2017, the US dollar was hotly circulated, the US dollar interest rate was low, and the cost of borrowing was relatively low. After Moody's flexed its muscles and downgraded China's credit rating, Chinese companies, especially real estate companies, continued to issue US dollar bonds, and in order to make US dollar bonds "cheaper", they have sought rating from rating agencies, bringing a batch of big business to "Moody's".

Moody's is equivalent to extracting a large amount of benefits from the expansion of China's economy (raising the interest rate on US dollar bonds) for foreign financial capital, and making a fortune for itself. This is the sweetness that Moody's has tasted.

(2) This year, before the collapse of Silicon Valley Bank, even the shareholders of the U.S. stock market knew that something was going to happen, and Moody's could still maintain its credit rating! Is this a bad thing for Moody's? This is an advertisement!

Musk posted on March 11 to "satirize" Moody's, and on March 21, Moody's "helped" Tesla to become a blue-chip stock. Is this "WOW" really ironic?

It's All Negative: What is Moody's doing?

In the first three quarters of 2023, Moody's cumulative revenue was $4.436 billion, a year-on-year increase of 6.18%. Silicon Valley Bank's rating is "accidental", and the advertising effect is good! This may be Moody's new way of playing. 

(3) In 2022, the Federal Reserve violently raised interest rates and reduced its balance sheet, the cold circulation of the US dollar came too quickly, the bond market was comparable to the Shura field, global debt issuance fell sharply, and Moody's experienced a decline in revenue for the first time in a decade.

For the first time, revenue from Moody's Investors Service (Sell-Side), which is responsible for credit ratings, was surpassed by Moody's Analytics (Buy-side). The latter provides professional services related to risk measurement and assessment to regulatory authorities, financial institutions and various commercial companies.

However, this business is "unsuitable" in China, and it has been beaten by system service providers in the field of credit risk management in China. In November 2022, Moody's was forced to lay off its analytics business in Chinese mainland.

Moody's Investor Service business, which remained in China, immediately suffered from the shrinking of the Chinese dollar bond market and the doubling of the rating service market due to the divergence of monetary policies between China and the United States, the RMB interest rate cut, the US dollar interest rate hike, and the inversion of the interest rate differential between China and the United States.

In February 2023, the implementation of Order No. 56 of the National Development and Reform Commission (NDRC) strengthened the supervision of the Chinese dollar bond market. For Moody's, it's a cold snap in the middle of a winter, and it's getting colder than colder.

In August, the Economic Observer reported that "Chinese-funded US dollar bonds: primary issuance hit a 10-year low". In the second quarter of 2023, the issuance scale of Chinese-funded US dollar bonds hit a new low since the fourth quarter of 2013: a total of 656 Chinese-funded US dollar bonds were issued in the primary market, with an issuance scale of only US$9.221 billion, a sharp decrease of 49.57% and 66.85% from the previous quarter and 66.85% year-on-year, respectively.

In the third quarter of this year, the Chinese-funded US dollar bond market rebounded slightly, with a total of 557 bonds issued in the primary market, with an issuance scale of US$12.682 billion, an increase of 37.54% month-on-month and a year-on-year decrease of 48.71%.

However, the interest rate of the US dollar is too high, and the companies that issue US dollar bonds either rely on "high ratings" to reduce costs, or they adhere to the mentality of "no rating is better than low rating" and "no rating is better than downgrading" and issue unrated bonds.

In the third quarter of 2023, the issuance scale of unrated Chinese dollar bonds was US$8.3 billion, accounting for 65.45% of the total issuance in the quarter, down 2.85% quarter-on-quarter, but up 20.21% year-on-year.

As of the end of the third quarter of 2023, the cumulative number of unrated bonds in the distribution of overseas bonds of Chinese enterprises reached US$633.1 billion, an increase of 48.4% from US$426.7 billion at the end of 2022. There are a lot of high-yielding real estate companies that have been turned to non-rated.

As a result, for Moody's, Chinese companies do not live on dollar bonds, and China does not have much of a Chinese dollar bond rating market, and downgrading China's credit rating will have little impact on himself, nor on China's economy and capital market, so the Chinese government will also be very "gentlemanly" and will not physically retaliate against rating agencies, and the cost of "raiding" rating outlook will be very low.

Besides, the cold circulation of the dollar is coming to an end, and there is a high probability that the Fed will lower interest rates in 2024.

At that time, the interest rate on the issuance of US dollar bonds will be lower, and the difference between "high-rated" and "low-rated" will be more pronounced in the market. Doing a wave of big advertising now can pave the way for the market to occupy the market next year and then - not only the Chinese market.

In short, Moody's downgrading China's rating outlook is very low, and the benefits are great!

That's not enough to please the United States!

Marx wrote in Capital that as long as there is a proper profit, capital will be emboldened. With low costs and high returns, what does Moody's not dare to do?

Moreover, historically, the transition from the cold circulation of the dollar to the hot circulation of the dollar is the most unstable time for the international financial market, and there may be a financial crisis where it will break out.

Moody's is now shouting, "I touched my ass with the two big tigers in China and the United States", which is also accumulating potential energy for his next series of actions.

When the big financial capital really wants to start harvesting, Moody's will be able to use "this set of combination punches that China has eaten" to give a "fatal blow" to the target who cannot protect itself, and take the opportunity to eat a mouthful of fat!

This Saturday (December 9) at 9pm, Hung Academy Micro Classroom will discuss "Venezuela and Guyana: The Third War?". Latin America is about to enter an era of chaos? In Latin America where general elections were held last year, left-wing forces generally won victories, and now that Latin American countries are being tested by the cold circulation of the US dollar, whether or not they can quickly stimulate economic development is the key to the stability of left-wing governments. This is true in Venezuela, it is true in Brazil, and it is true in Peru. If not, what will happen to Latin America? Everyone is welcome to participate in the event.

In 2023, when the global financial market is in turmoil, how to grasp the mystery of crisis and opportunity, see the general trend of the world, understand the market undercurrent, and choose the most suitable investment strategy for yourself?

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