Join +750K new investors every month who copy stock picks from billionaire's portfoliosSign Up Free

Moody's issues downgrade warning for China's credit rating amid economic challenges

Published 06/12/2023, 01:14 pm
Updated 06/12/2023, 01:30 pm
© Reuters.  Moody's issues downgrade warning for China's credit rating amid economic challenges
UK100
-
USD/CNY
-
0941
-
2628
-
USD/CNH
-

Ratings agency Moody's has issued a downgrade warning on China's credit rating, highlighting concerns over the costs associated with supporting local governments and state firms, as well as managing the ongoing property crisis. This move has shifted the outlook on China's A1 debt rating from "stable" to "negative," a change that mirrors a similar recent adjustment to the United States' credit rating.

The warning indicates potential broader economic risks for China, including the need for increased support for debt-laden local governments and state firms. Moody's cites these factors as risks to China's fiscal, economic, and institutional strength. Additionally, concerns regarding lower medium-term economic growth and the downsizing of the property sector have been raised.

In response, China's Finance Ministry expressed disappointment, asserting that the economy is poised for recovery and that the property crisis and local government debt issues are under control. However, the market reaction was less optimistic, with blue-chip stocks falling nearly 2% and the cost of insuring China's sovereign debt rising.

Despite affirming the A1 rating, Moody's predicts a slowdown in China's economic growth to 4.0% in 2024 and 2025, with an average of 3.8% from 2026 to 2030. This outlook contrasts with the views of S&P Global and Fitch, which maintain stable outlooks for China at an equivalent A+ rating.

Broader economic challenges

The International Monetary Fund (IMF) reports that local government debt in China reached 92 trillion yuan (US$12.6 trillion) in 2022, accounting for 76% of the country's economic output, up from 62.2% in 2019. This increase, along with significant capital outflows, underscores the mounting economic pressures facing China.

The situation reflects broader economic challenges for China, including the struggle to recover post-pandemic, a deepening housing crisis, local government debt concerns, slowing global growth, and geopolitical tensions. Analysts suggest that China's economic model may need to shift from debt-fuelled investment to one driven more by consumer demand. In light of these challenges, China's central bank has pledged accommodative monetary policy and structural reforms.

Read more on Proactive Investors AU

Disclaimer

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.