Commentary: Moody's downgraded outlook shows short-sightedness on China's fiscal stability

Moody's downgraded outlook on China's government credit ratings to "negative" from "stable" Wednesday shows a shortsightedness on its part regarding the country's fiscal matters.

The agency said the downgrade was driven by expectations that China's fiscal strength will continue to decline, the fall in its foreign exchange reserves and uncertainty about its policy priorities.

However, Moody's retained China's Aa3 rating, the fourth highest in its rating system. It is also the highest since the agency began its credit ratings on China in 1983.

Moody's move reflects a lingering pessimism over the Chinese economy among some overseas institutions, a miscalculation due to a lack of vision on China's fiscal stability.

Wang Tao, chief China economist with UBS AG, said the doomsayers lack facts to support their viewpoints given that Chinese policymakers plan on boosting economic growth through fiscal expansion.

With the support of a high savings rate, China's central bank can ensure relaxed money and credit conditions by cutting reserve requirement ratios, Wang said.

There are a number of reasons why China's fiscal strength will remain strong moving forward.

First, the Chinese government's ability to pay off its debt is far better than that of many Western economies. International institutions usually use two indexes to evaluate a country's fiscal risks -- its deficit should not exceed 3 percent of its gross domestic product (GDP) and general government debt-to-GDP ratio should not exceed 60 percent.

Chinese official figures showed that China's fiscal deficit in 2015 accounted for 2.3 percent of its GDP. Moody's said China's government debt reached 40.6 percent of its GDP at the end of 2015 and predicted it would rise to 43 percent in 2017, far below the 60 percent threshold.

Furthermore, while China's currency reserves have dropped by 762 billion U.S. dollars over the last 18 months to 3.2 trillion dollars in January 2016, they still account for up to 32 percent of its GDP at the end of 2015.

Second, China elevated its debt level to cultivate new growth points, which is not a bad investment since doing so will result in continuous cash flows for the future.

Wu Qing, a researcher with the Development Research Center of China's State Council, said Moody's only focused on the Chinese government's debt without noticing its colossal assets, a great part of which are operating assets featuring high liquidity.

Third, Western rating agencies have met with much skepticism in recent years regarding their credibility, authority and significance.

These agencies, which have long had a monopoly on credit counseling, usually give high ratings to Western economies and low ones to emerging markets to deliberately create "price scissors" in financing costs.

Moody's, too, has missed the mark on more than one occasion. Take Greece for example. Since the financial crisis broke out in 2008, the agency kept Greece's A1 rating -- the fifth highest in its rating system -- until the end of 2009 and offered no early warning of the European debt crisis.

China's economy will continue to expand as reforms continue to be fleshed out. But dramatic changes won't take place overnight.

Understanding the transformation underway in the country requires a long-term vision. That's more than we can say about Moody's outlook on China. Endi