Chinese Government Sovereign Credit Rating

The Sovereign credit rating of the Chinese government was recently upgraded by Standard and Poor’s as improving which is good news for the country of China. Let’s start by explaining what a sovereign credit rating is as it applies to the Chinese government. Essentially, countries issues bonds that are designed to raise money for the government to use. For example, the United States could issue a sovereign bond to the Chinese government that they can use as money that needs to be paid back.

In the past, many governments who have received sovereign bonds have not paid them back thus causing debt problems for the issuing country. Much like with consumers, a credit rating is then assigned to the borrowing country that shows their credit worthiness and whether or not they will be issued any more bonds. Classically, the Chinese government has defaulted on their sovereign bonds thus making their credit rating lower.

Recent improvements have been made in the repayment of the bonds issued to the Chinese government; their sovereign credit rating has been raised making them a slightly lower credit risk. Standard and Poor’s (S & P) is the company that monitors the sovereign credit ratings of various countries and they are the ones who have upgraded the Chinese government’s standing in the international market.

While some people disagree with the issuance of sovereign bonds to foreign countries, it’s all part of a way to generate income that can help impoverished countries produce goods that other countries – such as the United States – need and/or want. It’s sort of an investment in their country in an attempt to be sure that we can still receive things like food and mass produced goods from these countries.

All countries who borrow money through sovereign bonds have a sovereign credit rating. Often, it is disregarded by other countries, however, depending on what those countries are in need of. It’s like taking a roll of the dice on the off-chance that you’ll roll a 7 or 11 in craps and be a winner. Say we’re in need of a certain brand of tennis shoe that is produced cheaply in China, but the sovereign credit rating for the Chinese government is less than perfect. We still need those tennis shoes, so we might be inclined to go ahead and issue them a small bond so that they can produce the shoes that we need. They may or not pay back the bond, but it’s a chance we’re willing to take to fulfill our personal needs.

However, now that the Chinese government’s sovereign credit rating has been upgraded, things look good on the horizon when it comes to trade and supply.

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