Moody’s cuts China credit outlook, citing lower growth, property risks

REUTERS: Ratings agency Moody’s cut its outlook on China’s government credit ratings to negative from stable yesterday, in the latest sign of mounting global concern over the impact of surging local government debt and a deepening property crisis on the world’s second-largest economy.
The downgrade reflects growing evidence that authorities will have to provide more financial support for debt-laden local governments and state firms, posing broad risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.

 “The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” Moody’s said.
China’s blue-chip stocks slumped to nearly five-year lows on Tuesday amid worries about the country’s growth, with talk of a possible cut by Moody’s denting sentiment during the session, while Hong Kong stocks extended losses.

China’s major state-owned banks, which had been seen supporting the yuan currency all day, stepped up U.S. dollar selling very forcefully after the Moody’s statement, one source with knowledge of the matter said. The yuan was little changed by late afternoon.
The cost of insuring China’s sovereign debt against a default rose to its highest since mid-November.
“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. 

The move by Moody’s was the first change on its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt. While Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings yesterday - saying the economy still has a high shock-absorption capacity - it said it expects the country’s annual GDP growth to slow to 4.0 percent in 2024 and 2025, and to average 3.8 percent from 2026 to 2030.   

Moody’s outlook downgrade comes ahead of the annual agenda-setting Central Economic Work Conference, which is expected around mid-December, with government advisors calling for a steady growth target for 2024 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 A+, which is equivalent to Moody’s. Both have a stable outlook.    
China’s Finance Ministry said it was disappointed by Moody’s decision, adding that the economy will maintain its rebound and positive trend. It also said property and local government risks are controllable.