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Moody’s, a leading international rating agency, recently released a report signaling a notable shift in its assessment of China’s financial standing. While the agency maintained China’s sovereign credit rating, it revised the outlook from “stable” to “negative” on December 5. This adjustment came against the backdrop of concerns over economic deceleration, burgeoning local debt, and the exacerbation of financial strains due to the property market downturn.
This move follows Moody’s 2017 downgrade of China’s rating from Aa3 to A1, which held a stable outlook at that time. The agency’s decision to revise the outlook now, after nearly six years, reflects a growing pessimism regarding China’s debt risk. Moody’s has slashed its growth forecasts for China’s economy, anticipating a decrease to 4 per cent in 2024 and 2025. Furthermore, the agency expressed a somber outlook on long-term economic growth, projecting an average of 3.8% from 2026 to 2030.
China’s Ministry of Finance swiftly responded to Moody’s decision, expressing disappointment and offering rebuttals to the concerns raised. The Ministry highlighted the stabilization and recovery of the domestic economy in the third quarter, expressing optimism about sustained growth. It also underscored China’s strategies in addressing concealed local debt risks through measures like special refinancing bonds. Moreover, it defended the policy support directed toward the real estate market, downplaying the impact of the property downturn on local finances. The timely and prepared response from the Ministry hints at prior readiness for such a rating outlook adjustment.
However, the aftermath of Moody’s revision rippled through the domestic A-share market, contributing to a sharp decline on the same day. This response reflects investors’ wavering confidence in China’s economic trajectory.
Moody’s downgrade, the first in six years, not only signals concerns about mounting sovereign debt risks but also indicates apprehensions about the long-term outlook for the Chinese economy. While the adjustment may not immediately precipitate defaults among China’s local governments on their public debt, its influence on market expectations could have wider repercussions. Caution is warranted regarding the prolonged perils posed by local debt and the property market, tempering any inclination towards unwarranted optimism or complacency.