Moody’s Downgrades China Credit Score From Stable to Negative

A Moody's sign on the 7 World Trade Center tower in New York, on Aug. 2, 2011. Mike Segar/Reuters

Adding to growing global concerns over China’s faltering economy, credit ratings experts on Tuesday lowered their expectations on China’s recovery, disappointing Beijing, which still thinks the nation’s economy is “resilient.”

Moody’s downgraded China’s government credit ratings from stable to negative on the back of increasing local government debt and a widening housing crisis in the world’s second-largest economy.

According to Moody’s, the downgrade reflects growing evidence that authorities may have to give additional financial support for debt-laden local governments and state companies, posing broad threats to China’s fiscal, economic, and institutional strength.

Simultaneously, in its Greater China Research Note on Tuesday—and accessed by The Epoch Times—the Australian multinational banking and financial services company ANZ said that it expects a soft landing of China in 2024 due to property sector woes and deflation.

“China’s real GDP is forecast to grow 4.2 percent in 2024 and 4.0 percent in 2025. But nominal growth will likely be only 3.8 percent. The deflationary pressure remains high with the negative output gap,” the ANZ note said.

Moody’s, though, confirmed China’s A1 long-term local and foreign-currency issuer ratings on Tuesday, saying the economy still has a high shock-absorption capacity. But the ratings agency forecasted the annual GDP growth to drop to 4.0 percent in 2024 and 2025, and to average 3.8 percent from 2026 to 2030.

The Moody’s downgrade was the first revision in its China outlook since lowering its rating by one notch, to A1, in 2017, citing slower growth and rising debt.

“[The] outlook change reflects increased risks in China related to structurally, persistently lower medium-term economic growth,” said Moody’s.

China’s finance ministry, however, disagreed with the moves and reportedly reacted by saying it was “disappointed” by Moody’s downgrading of the country’s ratings outlook and that the economy “will maintain its rebound and positive trend.”

“Moody’s concerns about China’s economic growth prospects, fiscal sustainability and other aspects are unnecessary. The impact of the downturn in the real estate market on local general public budgets and government budgets is controllable and structural,” said the ministry, according to reports.

Beijing is also peeved since the downgrade comes ahead of the annual Central Economic Work Conference in mid-December, in which the government is expected to announce a steady growth objective for 2024 and further stimulus.

Risks to Growth

According to the ratings experts, China’s recovery has been impeded by poor consumer and corporate confidence, a lingering housing crisis, record youth unemployment, and a global recession that is reducing demand for Chinese goods.

But as the housing crisis worsened and the recovery from the stringent COVID-19 regulations was less robust than anticipated, China’s economy has found it difficult to gain momentum this year. In November, data showed that both manufacturing and services activities decreased, adding to the idea that the government needs to step in more to support the recovery, which is faltering.

“In the near term, downside risks to growth remain, as the downsizing of the property sector is a major structural shift in China’s growth drivers which is ongoing and could represent a more significant drag to China’s overall economic growth rate than currently assessed,” said Moody’s.

In turn, a more pronounced slowdown in growth in the near to medium term would exacerbate local government deficits and debt further, added the ratings agency.

Stressed Local Governments

The country’s focus has shifted to fiscal stimulus as a result of the worsening property market, with increased borrowing being the primary tool to support the economy. That has prompted worries about the country’s debt levels, especially because Beijing is expected to issue more bonds than ever before this year to support the economy.

As China’s headline budget deficit soared to its highest level in 30 years in October, Chinese leader Xi Jinping signaled that the country would not stand for a severe slowdown in growth or persistent deflationary threats. The current deficit-to-GDP ratio is 3.8 percent, which is significantly higher than the tolerable 3 percent limit, according to Bloomberg.

The slowdown has forced the central government to sell an extra 1 trillion yuan ($140 billion) worth of sovereign bonds this year, which, according to the government, will go toward disaster relief and building projects, reducing some off-balance sheet debt with higher expenses.

Local governments have also been aggressively selling special refinancing bonds as an alternative revenue source to offset the reliance on land sales amid the property downturn.

According to the most recent data from the International Monetary Fund, local government debt in China increased from 62.2 percent in 2019 to 76 percent of economic production in 2022, reaching 92 trillion yuan ($12.6 trillion).

Consequently, given that, the fiscal condition of local governments will continue to worsen in 2024, ANZ expects some form of local government financing vehicle (LGVF) defaults at least in the so-called non-standard, private debt arrangement as well.

“The change to a negative outlook reflects rising evidence that financial support will be provided by the government a wider public sector to financially stressed regional and local governments and state-owned enterprises, posing broad downside risks to China’s fiscal, economic, and institutional strength,” Moody’s said.

Accommodative Government

Despite the structural issues connected with reforms, such as huge debts, falling demand, and deflation, ratings analysts expect progressive reforms to continue.

“Government policy will still be structurally accommodative, aiming to support industrial transformation and tame systemic financial risk. The authorities will offer targeted support to local governments and the property sector. We [also] expect the People’s Bank of China will use a variety of tools to prove their accommodative stance,” said the ANZ note.

“China’s government has a track record of effectively deploying its vast resources to meet policy challenges,” said Moody’s.

Nevertheless, sour foreign investors believe that China’s problems are too big and the remedies announced so far have been too small to make a substantial difference.

According to a report by the State Administration of Foreign Exchange (cited by Bloomberg), China’s net capital outflows reached $53.9 billion in October 2023, the highest monthly level since January 2016. The report also states that nearly $54 billion was sent overseas on behalf of banking clients, which is pressuring the yuan down.

But capital outflows estimated by Goldman Sachs rose to $75 billion in September.