Moody's missive fails to change market mood

Besides, the reason why the Chinese government has expanded its debt is mainly to prevent possible deflation caused by capital flight. Since the mid-1990s, China has continuously seen trade surplus and a rise in foreign reserves, and outstanding funds for foreign exchange have become the main channel for its base currency issuance. This trend has not changed.

The drastic drop in China's foreign reserves in the past year means its base currency issuance through the outstanding funds for foreign exchange has declined considerably. Therefore, China needs to change its extant base currency issuance mechanism and depend on central bank's purchase of national debts for its base currency issuance. In this sense, a moderate rise in China's fiscal deficit and government debts, to some extent, symbolizes decreasing dependence on its monetary supply system on foreign countries, and its growing monetary and financial self-reliance.

Similarly, the decline in China's foreign reserves is not necessarily bad for its economy. Not all reductions in its foreign reserves were caused by capital flight; they were largely a result of assets transformation among enterprises, financial institutions and families in different currencies.

As a matter of fact, the continuous rise in China's foreign reserves for 10 years has huge pressure on its policymakers. During the period, China made huge efforts to ensure the rising foreign reserves benefited people, and to diversify its foreign assets to improve the assets' structure. Despite a tangible reduction, China's foreign reserves are still much larger than that of other countries, and they are enough to ensure its foreign debt servicing ability. Continuous trade surplus and inward foreign investment flows are further proof of China's ability in this regard.

To maintain their influence on markets, rating agencies should refrain from viewing China through tinted glasses and, instead, widen their vision and make objective evaluations.

The author is a researcher at the Ministry of Commerce's International Trade and Economic Cooperation Institute.