Chinese officials and state media are on the offensive after credit agency Moody’s downgraded its outlook for China’s credit rating from stable to negative.
On Tuesday, the agency forecast slowing growth in the coming years, in part due to China’s aging population, and said that the need for bailouts and government support could weigh on the country’s economic strength. While Moody’s downgraded the outlook, it retained China’s A1 rating, meaning there is a low credit risk.
Downgrading an outlook indicates that the nation’s rating might slip in the future. In November, Moody’s cut its U.S. outlook, citing political polarization as a factor.
“The change to a negative outlook reflects rising evidence that financial support will be provided by the government and 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 in a news release.
China’s finance ministry expressed disappointment with the analysis, arguing such concerns were “unnecessary” and that the country’s economic recovery is steady.
“In the face of the complex and severe international situation, and against the background of unstable global economic recovery and weakening momentum, China’s macro economy has continued to recover and high-quality development has steadily advanced,” the ministry said in a statement.
Earlier this year, the International Monetary Foundation upgraded its growth forecast for China from 5% to 5.4%. However, the agency estimated growth would slow in 2024, in part due to weakness in the property sector.
Indeed, Moody’s shift in stance comes as Beijing continues to battle the effects of an economic slowdown marked by high youth unemployment and weak consumer and business confidence, further exacerbated by spiraling real estate problems.
The sector’s woes follow a crackdown on excessive borrowing that started three years ago, with this ultimately triggering debt defaults by major property developers including Evergrande and Country Garden.
The domestic knock-on effects of the crisis have been far reaching. Local governments, which had in the past profited through land deals, are now struggling to recover from pandemic-era costs and loss of revenue. The IMF has said that local government debt reached 76% of economic output in 2022, up from 62.2% in 2019.
“Regions that relied most heavily on land sales are unable to materially offset the loss in revenue from other sources and will face financial strain for the foreseeable future,” Moody’s said, adding that this would entail support from the government and wider public sector.
Meanwhile, Chinese buyers are increasingly looking overseas and snapping up properties elsewhere in Asia, including in Japan and Thailand. The property sector’s woes also triggered a sell off of Chinese stocks by foreign investors.
Beijing has unveiled a number of measures — including issuing 1 trillion yuan in government debt in late October and interest rate cuts — to combat these issues, but efforts to attract foreign investment continue to be challenged by the economic uncertainty and lingering geopolitical tensions, particularly with the U.S.
On Wednesday, the People's Bank of China moved to strengthen the yuan against the dollar, after multiple reports that China’s state banks had been bolstering the currency behind the scenes, amid concerns about weakening of the yuan following the outlook downgrade.
Following the release of the Moody’s report, state media quoted officials and local experts who criticized the credit agency for taking a shortsighted view of China’s economic recovery and overestimating debt figures.
While China’s officials suggest a more optimistic path ahead, the real estate crisis continues to bite.
There are reports that struggling Country Garden, which is believed to be responsible for millions of unfinished housing units, may be granted government support, while earlier this week Evergrande was granted a court hearing adjournment until January amid potential liquidation.
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