Daily Management Review

Moody's Issues A Downgrade Warning For China As Pressures On Growth And Real Estate Increase


Moody's Issues A Downgrade Warning For China As Pressures On Growth And Real Estate Increase
On Tuesday, rating agency Moody's issued a downgrade warning for China's credit rating, citing financial burdens on the world's second-biggest economy from having to support local governments, state-owned enterprises, and manage its real estate crisis.
Less than a month after it had downgraded the United States' final triple-A grade from a credit rating agency, Moody's downgraded the "outlook" on China's A1 debt rating to "negative" from "stable."
In the past, when a negative rating outlook is assigned to an issuer, around one-third of the issuers are downgraded within 18 months.
More help from Beijing is probably needed for state companies and local governments that are heavily indebted and provide "broad downside risks to China's fiscal, economic, and institutional strength," the report continued.
Moody's additionally highlighted "increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector."
The Finance Ministry of China expressed disappointment with the decision, stating that the property crisis and local government debt concerns were manageable and that the economy would recover.
"Moody's concerns about China's economic growth prospects, fiscal sustainability and other aspects are unnecessary," the ministry said.
Amid concerns about growth, blue-chip stocks fell by about 2% to almost five-year lows. Prior to the statement's release, some traders had speculated about Moody's remarks.
According to a person with knowledge of the situation, China's main state-owned banks, which had been backing the yuan all day, stopped selling US dollars in response to the news.
As the price of default insurance for China's sovereign debt increased to its highest level since mid-November, the U.S.-listed shares of major Chinese companies, Alibaba and JD.com, saw declines of 1% and 2%, respectively.
"For now the markets are more concerned with the property crisis and weak growth, rather than the immediate sovereign debt risk," said Ken Cheung, chief Asian FX strategist at Mizuho Bank in Hong Kong.
It was the first downgrade to A1 in 2017 amid rising debt levels, which was the only other downgrade Moody's had made to its China rating.
Despite noting that the economy still possessed a high capacity to absorb shocks, Moody's maintained its A1 rating on Tuesday. However, the rating agency also predicted that China's economic growth would fall to 4.0% in 2024 and 2025 and average 3.8% from 2026 to 2030.
During a lengthy scheduled global outlook call, S&P Global, Moody's primary rival, expressed concern that "spillovers" from a deteriorating property crisis could drive China's GDP growth "below 3%" in the upcoming year.
In the upcoming week or two, the 'Central Economic Work Conference,' which sets the annual agenda, is expected to hear pleas for increased stimulus from China's government advisers.
'Investment-grade' level is sufficiently reached by China's A1 rating, according to analysts, so a reduction is unlikely to push global funds to sell.
China is rated A+, which is the same as Moody's A1, by S&P and Fitch, the other two major global rating agencies, with stable outlooks.
The majority of economists predict that China's growth will reach the government's 5% objective this year, but the comparison is with a 2022 that is far more uneven due to COVID-19.
Geopolitical tensions, decreasing global growth, the worsening housing crisis, and worries over local government debt have all slowed the economy's ability to recover from the pandemic.
Authorities are under pressure to implement additional stimulus since a flurry of policy support initiatives have only shown modest benefits.
"We spent the better part of three years watching China have this sort of off-and-on reopening from the pandemic, and this was the year they finally sort of officially reopened," said Art Hogan, chief market strategist at B Riley Wealth in New York.
"But the pace at which the economy has recovered from that has been disappointing."
Most analysts concur that following the country's explosive rise in the previous few decades, China's growth is now decreasing. Many think Beijing has to change its economic model so that it is more focused on consumer demand and less dependent on debt-fueled investment.
In addition to pledging to maintain an accommodating monetary policy to boost the economy, China's central bank chief, Pan Gongsheng, also recommended structural changes to lessen the country's reliance on property and infrastructure for growth.
In October, China said that it would raise the aim for the 2023 budget deficit from 3% to 3.8% of GDP by issuing 1 trillion yuan ($139.84 billion) in sovereign bonds by year's end in an effort to boost economic growth.
Rating agencies have been alerting people to the contingent liability concerns associated with debt-ridden Chinese towns due to years of overinvestment, declining land sale profits, and skyrocketing COVID-19 response costs.
According to the most recent figures from the International Monetary Fund (IMF), local government debt increased from 62.2% in 2019 to 92 trillion yuan ($12.6 trillion), or 76% of China's economic output, in 2022.
Goldman Sachs statistics revealed that capital outflows from China have also increased, hitting $75 billion in September, the largest monthly outflow since 2016.