Moody’s lowers its credit outlook for China due to lower growth and real estate risks

Dec 5 (Reuters) – Ratings agency Moody’s cut its outlook for the Chinese government’s credit rating to negative from stable on Tuesday, in the latest sign of growing global concern about the impact of rising local government debt and a worsening real estate crisis on the world’s second-largest economy. largest economy.

Moody’s said in a statement that the downgrade reflects growing evidence that authorities will have to provide more financial support to heavily indebted local governments and state enterprises, posing broad risks to China’s financial, economic and institutional strength.

“The change in outlook also reflects heightened risks associated with sustained, structurally low economic growth over the medium term and the continued downsizing of the real estate sector,” Moody’s said.

China’s blue-chip stocks fell to their lowest levels in nearly five years on Tuesday amid concerns about the country’s growth, with talk of a possible downgrade by Moody’s souring sentiment during the session, while Hong Kong stocks extended losses.

A source familiar with the matter said that China’s major state-owned banks, which had been supporting the yuan throughout the day, intensified selling of the US dollar very strongly after Moody’s statement. The yuan was little changed by late afternoon.

The cost of insuring China’s sovereign debt against default has risen to its highest levels since mid-November.

“Markets are now more interested in the property crisis and weak growth, rather than direct sovereign debt risks,” said Ken Cheung, chief Asian exchange market strategist at Mizuho Bank in Hong Kong.

Shares of Chinese companies listed in the United States fell, with Baidu shares falling 0.5%, Alibaba Group Holding shares falling 1.1%, and JD.com shares falling 1.9%.

Moody’s move was the first change in its view on China since it lowered its rating by one notch to A1 in 2017, also citing expectations of slower growth and higher debt.

While Moody’s Confirm China’s A1 long-term ratings for domestic and foreign currency issues on Tuesday – saying the economy still has a high capacity to absorb shocks – said it expects the country’s annual GDP growth to slow to 4.0% in 2024 and 2025, and to average 3.8%. From 2026 to 2030.

Moody’s downgrade comes ahead of the annual agenda-setting Central Economic Work Conference, which is expected around mid-December, with government advisers calling for a steady 2024 growth target and more stimulus.

Analysts say the A1 rating is high enough in investment grade territory that a downgrade is unlikely to trigger forced selling by global funds. The other two major rating agencies, Fitch and Standard & Poor’s, rate China at A+, which is equivalent to Moody’s. Both have a stable outlook.

The Chinese Ministry of Finance said it was disappointed with Moody’s decision, adding that the economy would maintain its recovery and positive trend. She also said property and local government risks are manageable.

“Moody’s concerns about China’s economic growth prospects, financial sustainability and other aspects are unnecessary,” the ministry said.

Fight for traction

Most analysts believe China’s growth is on track to meet the government’s target of about 5% this year, but that compares to a Covid-weakened 2022, and activity is highly uneven.

The economy is struggling to mount a strong post-pandemic recovery, as a deepening crisis in the housing market, concerns about local government debt, slowing global growth, and geopolitical tensions have dampened momentum.

A series of policy support measures have proven only modestly helpful, increasing pressure on the authorities to roll out more stimulus.

“We’ve spent the better part of three years watching China do this sort of staggered post-pandemic reopening, and this was the year it finally officially reopened,” said Art Hogan, chief market strategist at B Riley Wealth. New York. “But the pace of the economy’s recovery from that has been disappointing.”

Analysts widely agree that China’s growth is lagging behind the rapid expansion seen over the past few decades. Many believe that Beijing needs to shift its economic model from an over-reliance on debt-driven investment to one driven more by consumer demand.

Last week, Chinese central bank chief Pan Gongsheng pledged to keep monetary policy accommodative to support the economy, but also urged structural reforms to reduce reliance on infrastructure and real estate for growth.

Deeper into debt

After years of overinvestment, falling revenues from land sales, and rising costs of fighting the coronavirus, economists say debt-laden municipalities now pose a major risk to the economy.

Local government debt reached 92 trillion yuan ($12.6 trillion), or 76% of China’s economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund.

In October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) worth of sovereign bonds by the end of the year to help kick-start activity, raising the 2023 budget deficit target to 3.8% of GDP from 2023 to 3.8% of GDP. original 3%

The central bank has also implemented modest interest rate cuts and pumped more money into the economy in recent months.

However, foreign investors have been dissatisfied with China almost all year.

Capital inflows from China rose sharply to $75 billion in September, the largest monthly figure since 2016, according to Goldman Sachs.

($1 = 7.1430 Chinese yuan)

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