Moody’s Downgrade Warning for China: Economic and Property Challenges

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By Carina

Moody’s, a prominent ratings agency, issued a warning on Tuesday regarding a potential downgrade of China’s credit rating.

This move signals growing concerns over the financial burden of supporting local governments and state-owned enterprises amidst a deepening property crisis.

The statement by Moody’s highlighted the need for increased financial support, which could strain China’s fiscal stability and economic growth.

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Market Reactions and Economic Indicators

In response, China’s blue-chip stocks plummeted, reaching near five-year lows, reflecting broader concerns about the nation’s economic growth.

Additionally, the cost of insuring against a default on China’s sovereign debt spiked to its highest level since mid-November.

Experts like Ken Cheung, chief Asian FX strategist at Mizuho Bank, noted a shift in market focus towards the property crisis and sluggish growth.

Impact on US-listed Chinese Firms

The warning also reverberated across the Pacific, affecting US-listed Chinese companies. Notable firms like Baidu, Alibaba Group Holding, and experienced declines in their share prices. 

Moody anticipates China’s annual GDP growth decelerating in 2024 and 2025. This outlook revision is the first since Moody’s downgraded China’s rating to A1 2017.

Despite affirming the A1 rating currently, Moody’s projects a slowdown in growth to 4.0% in 2024 and 2025, with an average of 3.8% from 2026 to 2030.

Comparison with Peer Ratings

S&P Global, another central rating agency, echoed concerns about the potential negative repercussions of the property crisis on China’s GDP.

S&P and Fitch maintain China at an A+ rating, equivalent to Moody’s A1, with stable outlooks. 

China’s Finance Ministry expressed disappointment with Moody’s decision but remained optimistic about the economy’s positive trend.

The Ministry also assured that risks in the property sector and local government debt are manageable.

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Struggling Economy

China’s economy, aiming to meet a 5% growth target this year, has struggled to recover post-pandemic. Challenges like the housing market crisis, local government debt, and geopolitical tensions have impeded economic momentum.

Despite policy support measures, authorities face pressure to introduce more stimulus. 

Analysts’ Viewpoint

Experts concur that China’s economic growth model is shifting. The consensus is that China needs to pivot from a debt-driven investment model to one propelled by consumer demand.

China’s central bank has promised to maintain supportive monetary policy while advocating for structural reforms.

Debt Concerns

China faces increasing local government debt, which stood at 92 trillion yuan in 2022, representing a significant portion of the GDP. 

In response, China plans to issue substantial sovereign bonds and has adjusted its budget deficit target to counteract these challenges.

This comprehensive overview reflects Moody’s assessment and its implications for China’s economic outlook, highlighting the complexities of managing growth in mounting fiscal challenges.

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