Pudong Was Still a Swamp Last Time Moody's Cut China Debt Rating

(Bloomberg) -- China’s previous credit rating downgrade by Moody’s Investors Service in 1989 came after a crackdown on student protesters in Beijing’s Tiananmen Square, and as the Berlin Wall was poised to fall. Pudong, now home to the nation’s gleaming financial center in Shanghai, was still a swamp.

Moody’s latest downgrade to A1 from Aa3 Wednesday comes as President Xi Jinping pushes China’s influence around the world. That was highlighted by this month’s gathering of global leaders in Beijing to celebrate a multi-billion dollar infrastructure-building initiative along the old Silk Road that Xi describes as the "project of the century."

In 1989, China was more global pariah than a champion of the global economy. Tiananmen triggered international sanctions, contributing to a growth plunge to 4.2 percent.

"On my first visit to Beijing in 1990, the car I took from the airport was one of the very few on the road, and the biggest challenge for the driver was to avoid a clash with the thousands of bikes, many with veg stalls on the back," said Jim O’Neill, previously chief economist at Goldman Sachs Group Inc. and a former U.K. government minister. "Eleven years later, when I was at Goldman Sachs, the economy was closing on $1 trillion. Today it is over $11 trillion."

The 1989 credit-rating setback proved temporary. Late former leader Deng Xiaoping went on his famous tour of southern China in 1992 to promote market reforms, unleashing years of double-digit expansion.

China has since become an economic colossus, contributing about one third of global growth last year. It’s on track to expand at an estimated 6.6 percent this year.

But it’s been a credit-fueled expansion. And that’s what’s got Moody’s worried.

Marie Diron, senior vice president at Moody’s in Singapore, says the economy is increasingly dependent on policy stimulus and that’s pushing leverage ever higher. She also noted the stark differences between now and 1989.

"China’s rating is today much higher at A1 because we’ve seen a long period of very fast growth, very rapid increase in income levels that provide some shock absorption capacity," she said. The one similarity between the two events is that in 1989 there also was pressure on policy makers to restructure the state-owned enterprise sector as its debt burden drags on the economy, adding pressure on the financial sector, she said.

In 1989, China’s GDP was below $400 billion, smaller than the Spanish economy, said Rajiv Biswas, Asia-Pacific chief economist at IHS Markit in Singapore. Today, it’s around 30 times bigger and ten times larger than Spain’s, he said.

Local stock markets and the currency initially dipped on the cut by Moody’s on Wednesday, before paring losses in the afternoon. More enduring was the bout of reflection it spurred among long-term China watchers.

"In 1989, I was heavily into Grunge and about to go to university," said Michael Every, head of financial markets research at Rabobank Group in Hong Kong. "China was also pretty grungy. We were still living on the fumes of the whole ‘Japan is going to take over the world economy’ meme. Look at how that ended."