Chinese Government Sovereign Credit Rating – An Insight

Let's start at the very beginning..it's a very good place to start with. We know what Chinese Government means, what credit rating means, but Sovereign Credit Rating?

Simply it means that countries are rated the same way by other countries regarding their credit rating as we, individuals or entities are rated by our banks, financial institutions and creditors. That's it.

Since it is between independent countries, the word Sovereign, meaning the 'above all' is applied to the buying and selling of bonds, currencies, import and export of goods and services amongst the countries. Everything else remains the same. If we default, we are penalized, and if we persist in default, we are marked as 'risky', and if there is no improvement we are moved further back to bad credit. If we repair the credit default, we move back slowly as we continue to redeem our debts by whatever means.

Exactly the same applies to countries lending to each other.

In the case of the US of A, Standard and Poor's has been designated the authority to determine the credit viability of the countries to which the US Government can issue bonds, other instruments, and also weigh the pros and cons of dealing with countries. If the rating is poor, then obviously, normal standards would not apply with that country. Business in US is put on notice. Taking this further, raising or lowering the rating impacts positively or negatively the business interest in the country for whom it has been issued.

So Standard and Poor's raised the Sovereign credit rating of Chinese Government as improving, it means that the Chinese Government has taken steps to redeem the bonds and other instruments issued to it, and based on that 'improving' you can well determine that the Chinese Government had defaulted earlier in regard to the instruments issued before. Since the bonds are backed by solid money, the issuing country faces a problem with its own funds flow, just our creditors do, when we don't pay on time. And that signals to other countries that Chinese Government has to be carefully tackled when dealing on monetary issues.

Just like us individuals, countries that receive a higher rating than the existing one, it is an occasion for some happiness for that country as a whole. Downgrade is just the opposite. Neutral means wait and watch.

There is one difference however in Sovereign Credit. It is used between countries, either on their own, or jointly, to issue Sovereign Bonds or others to countries which do have low rating. This is done to help the country which is facing economic problems to rise above it, by creating infrastructure for its goods, which is then sourced by the other countries so that incomes rise in the receiving country, and the issuing countries get preferential treatment in the manner and prices of the goods and services received. It is known better as an "Investment in the future for ourselves". Be careful here. 'For ourselves does not mean only the US, but each of the countries which have issued those instruments. There are dissenting voices on this matter, but in a democracy the majority prevails, and nothing needs be said of the dictatorial or totalitarian regimes.

We need certain goods and services which are becoming expensive to produce ourselves for a variety of reasons. In the case of China, we find that it is a low cost country, and therefore it would be cheaper for our consumers if those goods and services come from China. Despite it having a low rating, the US Government would issue a small sized Sovereign Bond to China, to help it produce those goods and services we need. If China does defaults, we shrug it off as a loss, and look for a better place to invest in which may turn out to be better in its efforts than China.

So when China's rating is raised just that little bit, it means that things have gotten a little better for business with China.

Source by Abhishek Agarwal

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