Published: 14:52, April 19, 2024
Credit investors to see clearly
By Marcos Cordeiro Pires

Fitch’s China rating will not shake market confidence in nation’s economy

Neoliberal economists use projections such as graphs, equations, and correlations to support their arguments, which may be motivated by political objectives or to swell the exorbitant profits of the financial market and multinational corporations.

This system is a large, well-oiled machine comprising banks, investment funds, brokers, stock and futures exchanges, public servants, economics professors, economic journalists, and rating agencies.

The 2008 financial crisis offers a prime example of such manipulation, in which real estate securities with terrible liquidity were wrapped in gold paper, called collateralized debt obligation, and sold on the global financial market as if they were gold bars.

The leading rating agencies, Standard & Poor’s, Moody’s Investors Service, and Fitch Ratings, classified those collateralized debt obligations with the best credit rating: AAA. Banks and investment funds worldwide suffered huge losses because this risk classification was fraudulent.

On April 9, Fitch Ratings cut its outlook on China’s sovereign credit rating to negative, citing risks to public finances due to the economy facing increasing uncertainty in the face of real estate and demographic problems, state debts, and the drop in the growth rate, resulting in worsening prospects for China’s economy.

When a rating agency issues a rating, it generally becomes a self-fulfilling prophecy. Considering the herd behavior of market agents, a negative note can initiate a speculative movement against a company or a country.

However, despite this being part of an attempt to shake the market’s confidence in the Chinese economy, the nation’s economy will continue to demonstrate that it is unstoppable.

There are sectors in which the Chinese industry has created a vast comparative advantage, such as hybrid/electric vehicles and clean energy generation equipment.

No other country is advancing faster in decarbonizing its economy. Last year, Huawei managed to circumvent external sanctions on semiconductors and launched a high-end smartphone with locally produced chips.

Faced with new contradictions arising in China due to its new level of development, the Chinese government is launching an extensive, advanced manufacturing program, which will qualitatively transform the country’s industry.

Therefore, there is no ground in which the pessimism the rating agencies are seeking to sow can take root.

To understand this mechanism, it is worth mentioning the economist John Kenneth Galbraith, who in 2004 published the book The Economics of Innocent Fraud: Truth for Our Time, in which he analyzed the foundations of the financial crisis of 2000 and 2001 in the United States.

In it, Galbraith says that “in the economic and especially the financial world, prediction of the unknown and unknowable is a cherished and often well-rewarded occupation. Because what is predicted is what others wish to hear and what they wish to profit or have some return from, hope or need covers reality. Thus, in the financial markets we celebrate, even welcome, essential error.”

It is important to reflect on this opinion because it points to the essence of the hidden logic of studies and projections made by “mainstream” neoliberal economists.

Behind the “empirical evidence”, there is always a well-established political and financial interest. Thus, it is worth closely observing the actions of credit rating agencies.

In practical terms, risk agencies wash their hands of their responsibilities by claiming their risk analyses are “opinions”.

Journalist Michael M. Lewis drew attention to this fact when researching the role of these agencies in the subprime crisis.

He said: “In 2008, when the ratings of a giant pile of subprime-related bonds proved meaningless, their intended meanings were hotly disputed. Wall Street investors had long interpreted them to mean the odds of default.

“For instance, a bond rated Triple-A historically had less than a 1-in-10,000 chance of defaulting in its first year of existence. A bond that is rated Double-A — the next highest rating — stood less than a 1-in-1,000 chance of default, and a bond rated triple-B, less than a 1-in-500 chance of default.

“In 2008, the rating agencies would claim that they never intended for their ratings to be taken as such precise measurements. Ratings were merely the agencies’ best guess at a rank ordering of risk.”

When we are faced with the “opinions” of risk agencies, we need to be very careful with the information disclosed. There are always interests behind the graphs, models, and equations they present.

In all cases, but specifically with Fitch’s note on China’s credit, it is worth reinforcing an old lesson once again: Seek truth from facts, not opinions.

The author is a professor of international political economy at Sao Paulo State University in Brazil. The author contributed this article to China Watch, a think tank powered by China Daily. 

The views do not necessarily reflect those of China Daily.