Balance of Power: Chinese Downgrade

Why Moody's Downgraded China to A1

As the world fixates on President Donald Trump's trip to Europe and the Middle East, alarm bells are ringing in one of the global economy's main engines.

China's debt rating was cut by Moody's today for the first time since 1989 -- the year of the Tiananmen Square crackdown -- raising questions about President Xi Jinping's ability to rein in state debt without jeopardizing economic growth.

China retorted that Moody's reasoning was “absolutely groundless” and it underestimates the government's ability to pass reforms.

But the downgrade is a blow to Xi in an important political year, which culminates in a reshuffle of his leadership bench. The economy -- which is now growing at its slowest pace in a quarter-century -- is a sensitive topic in one-party China, where the Communist Party touts its management record in order to preserve control.

Xi's authority is unchallenged at home. But the downgrade is a reminder that things might be about to get a lot harder for him.

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Commuters on their bikes make their way through heavy rain in Shanghai on June 15, 2015.
Commuters on their bikes make their way through heavy rain in Shanghai on June 15, 2015.
Photographer: JOHANNES EISELE/AFP/Getty Images

Global Headlines

Manchester attack tests leaders | Politics are still on hold after the bombing that killed 22 people on Monday and, as Robert Hutton and Thomas Penny explain, it’s not clear what effect the attack will have on the June 8 election. It could prompt voters to refocus on Prime Minister Theresa May's message that she’s a strong leader in dangerous times. Or it could bolster Labour Party leader Jeremy Corbyn's argument that the U.K.'s involvement in Middle East wars has made it a target.

Britain scolds U.S. over intel leaks | U.K. Home Secretary Amber Rudd chastised U.S. officials for leaking details about the Manchester terrorist attack to the press just one week after Trump was criticized for sharing sensitive information with Russia. The rare rebuke highlights the risk that key U.S. allies could become more reluctant to share vital information. “I have been very clear with our friends that that should not happen again,” Rudd said.

Is Trump about the flood the oil market? | Trump's proposal to sell almost half of the U.S.'s strategic reserve -- about 270 million barrels -- could undermine efforts to prop up prices. Unlike other aspects of Trump's budget proposal, the plan may gain legs in Congress, which has voted three times in the past two years to reduce the stockpile. OPEC leaders meet in Vienna on Thursday to decide whether to extend production cuts to reduce a worldwide glut.

U.S. budget cuts “clean coal” research | Trump's campaign promise to bring coal jobs back and make the energy source cleaner has a funding problem. That's because his budget proposal would slash spending for “clean coal” research by 85 percent. Still, as Ari Natter writes today, coal has a lot of friends in Congress and Republicans might well restore the money as they throw out Trump's budget and implement their own.

Philippine president declares martial law | Rodrigo Duterte cut short a trip to Moscow to put the military in charge of his home region in the country's south, which has been wracked for decades by an Islamic insurgency. While Mindanao has vast mineral deposits, Duterte's move shows how badly the security situation has deteriorated and how far he remains from unlocking the area's economic potential.

Zuma's judgment day looms | ANC leaders will debate ousting South African President Jacob Zuma from his post this weekend as the country's political crisis deepens. While Zuma still commands a majority in the party's executive committee, his vice president says the country is becoming a “mafia state” and large swathes of his party want him gone. The rand gained yesterday as investors bet his days are numbered.

And finally... Pope Francis and Trump met at the Vatican this morning and the differences in style were on display before they even shook hands. The pontiff rolled up in a Ford Focus and Trump arrived in a presidential motorcade. Trump gave him books by Martin Luther King Jr. In return, Trump got one that the pope described as a treatise on "our common home, the environment'' -- an attempt, perhaps, to sway Trump's thinking as he considers whether to pull out of the Paris climate accord. Next stop for Trump: a NATO summit in Brussels, a city he described as a “hellhole” during the campaign. 

Pope Francis meets with President Donald Trump at the Vatican on May 24, 2017.

Pope Francis meets with President Donald Trump at the Vatican on May 24, 2017.

Photographer: ALESSANDRA TARANTINO/AFP/Getty Images
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