Moody’s warns it may downgrade China

Hong Kong/New Delhi (CNN) — Moody’s downgraded its outlook on China’s credit rating to negative from stable on Tuesday, citing risks related to “structurally and persistently lower medium-term economic growth” and ongoing troubles in its property sector.

The lowering of its outlook does not automatically mean the ratings agency will downgrade China’s creditworthiness, but it increases the chances.

Moody’s said the change reflects rising evidence that the authorities will provide financial support to cash-strapped local governments and state-owned enterprises, “posing broad downside risks to China’s fiscal, economic and institutional strength.”

The deteriorating outlook comes at a time when the world’s second largest economy is grappling with numerous economic problems.

China’s growth, one of the fastest sustained expansions for a major economy in history, was propelled for decades by a housing boom fueled by a rising population and urbanization.

But the all-important property market, which has accounted for as much as 30% of the economy, fell into crisis more than two years ago after a government-led clampdown on developers’ borrowing. Analysts say the property downturn is likely to drag on, hobbling China’s growth prospects for years.

Another major concern for the country is local government debt, which has soared largely due to a sharp drop in land sale revenues because of the property slump, as well as the lingering impact of the cost of imposing pandemic lockdowns.

There are worries that the real estate crisis could trigger a wider financial meltdown. Major companies in China’s $3 trillion “shadow banking” industry — a sector that forms an important source of finance in the country — are facing mounting financial troubles, partly because of their exposure to failed property investments.

What’s more, China faces long term population decline. The nation’s fertility rate is now even lower than Japan’s, a country long known for its aging society. Earlier this year, China released data that showed its population started shrinking last year for the first time in six decades.

The decline in labor supply and increased healthcare and social spending could lead to a wider fiscal deficit and higher debt burden. A smaller workforce could also erode domestic savings, resulting in higher interest rates and declining investment.

Slower growth, weaker demographics

Moody’s expects China’s annual economic growth rate to slow to 4% in both 2024 and 2025, and average 3.8% a year from 2026 to 2030. Structural factors, including weaker demographics, could drive a decline in potential growth to around 3.5% by 2030, it added.

China’s is expecting growth of “around 5%” this year.

Moody’s retained its long-term A1 rating on China’s sovereign bonds.

“The affirmation of the A1 rating reflects China’s financial and institutional resources to manage the transition in an orderly fashion,” the agency said. “Its economy’s vast size and robust, albeit slowing, potential growth rate, support its high shock-absorption capacity.”

China’s Finance Ministry said Tuesday it was “disappointed” with Moody’s decision to downgrade the country’s credit outlook.

“China’s economy is shifting to high-quality development, new drivers of China’s economic growth are taking effect, and China has the ability to continue to deepen reforms and respond to risks and challenges,” it said in a statement, adding that Moody’s concerns about the country’s growth prospects and fiscal sustainability are “unnecessary.”

Markets, however, were not convinced. The CSI 300 Index, which tracks the top 300 stocks on the Shanghai and Shenzhen stock exchanges, closed down 1.9% on Tuesday, its lowest level since February 2019. Hong Kong’s Hang Seng also closed down 1.9% on Tuesday, it lowest level since November 2022.

Anna Cooban contributed to this report.

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