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China’s Credit Rating Outlook Shifts to Negative: Moody’s Analysis and Market Impact

Last Updated on 2023/12/05

Moody’s Downgrades China’s Credit Outlook

Moody’s, a prominent credit rating agency, has revised its outlook on Chinese sovereign bonds from stable to negative. This downgrade, announced on Tuesday, reflects growing concerns over China’s ability to repay its government borrowing amidst a faltering economy. The main triggers include the ongoing crisis in the property sector and the increasing likelihood of Beijing needing to bail out local governments and state-owned enterprises burdened by rising debts.

Impact on Local Governments and State Enterprises

The economic slowdown in China, exacerbated by a crackdown on excessive borrowing in 2020, has severely affected local government revenues, which heavily relied on the real estate sector. State enterprises seeking loans for expansion face challenges due to growing property defaults. The property developer Evergrande, once China’s largest, has been a notable victim, grappling with over $300bn in debt.

Government’s Response and Market Reaction

In response to Moody’s decision, China’s finance ministry expressed disappointment, stating that the recovery is progressing steadily and the concerns raised by Moody’s are unwarranted. However, the announcement led to a decline in Chinese stock markets, with the Hang Seng index and Shanghai Composite index witnessing notable drops.

Moody’s Rationale for the Downgrade

Moody’s justifies its decision by highlighting the need for government intervention in supporting banks and local governments. This intervention, they argue, poses broad risks to China’s fiscal, economic, and institutional strength. Additionally, structural shifts in the property sector are expected to significantly drag down economic growth. Moody’s projects a decline in potential growth to about 3.5% by 2030, influenced by factors like an aging population.

Global Perspective and Future Outlook

This downgrade is not an isolated event but part of a broader global concern regarding the debt level in the world’s second-largest economy. Moody’s maintains China’s credit rating at A1 but warns of possible future downgrades. The agency estimates China’s economic growth to slow down considerably in the coming years.

Broader Economic Challenges

China’s economy has struggled to rebound post-pandemic, with the housing crisis, local government debt concerns, and global geopolitical tensions curbing momentum. There’s a growing consensus that Beijing needs to shift its economic model from debt-fuelled investment to one driven more by consumer demand. In response, the Chinese government has announced plans to issue significant sovereign bonds and has raised its budget deficit target to stimulate the economy.

Source: The Guardian
Feature source: Unsplash

Topics: Impact of Moody’s downgrade on China’s economy, Reasons behind Moody’s negative outlook for China, Future predictions for China’s credit rating, China’s property sector collapse and global economy, Moody’s assessment of Chinese sovereign bonds, Chinese government’s response to credit rating downgrade, Long-term economic implications of China’s debt crisis, China’s fiscal challenges in the face of an aging population, Moody’s analysis of China’s structural economic issues, Evergrande’s influence on China’s credit outlook.

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