Earlier today, we said the following about S&P’s move to follow Moody’s (with a 4-month delay) in downgrading China:
Of course this will tempt Beijing to simply double down on efforts to “smooth” things over which is the ultimate irony. The more people warn about instability, the less likely it is that things will become unstable – at least in the near-term. The long-run is another story entirely.
We also said this about the timing:
Well, the timing leaves something to be desired [as] it shows not much in the way of decorum ahead of the Party Congress.
The point: Beijing is already predisposed to intervening in markets to offset any turmoil a sovereign downgrade might catalyze and you can bet that predisposition is stronger than ever ahead of the Party Congress.
To be sure, trading this is complicated by the fact that the yuan has appreciated rapidly over the past several months, perhaps making it less likely that the PBoC would move to aggressively to support the currency following the S&P move in order to avoid accidentally setting off another wave of appreciation just when it looks like the removal of the reserve requirement on forwards has succeeded in restoring two-way price action. That said, you really only need one simple chart to understand why betting on any kind of negative market reaction to the latest downgrade might be a bad idea:
“The news could read positively in China,” Qin Han, chief bond analyst at Guotai Junan Securities Co. in Shanghai said on Thursday, underscoring everything said above. “Domestic investors may expect the government to release supportive policies to ease any disruption.”
Meanwhile, you can bet Xi’s reaction to the S&P move approximated his trademark side-eye: