Explainer: How could Moody’s warning affect China’s economy?

Moody’s has downgraded China’s sovereign credit rating to negative, citing growing growth risks and a property sector crisis in the world’s second-largest economy. The downgrade follows a month-long lower of the US’s triple-A credit rating, indicating a growing likelihood of default over the past year. The AUD/USD pair was up 0.01% at 0.6554 at the time of press. Significant risks to the world’s second-biggest economy, have been cited including the costs of controlling the country’s property crisis and rescuing local governments and state-owned businesses.

Less than a month after it had downgraded the United States’ final triple-A grade from a credit rating agency, the agency now reduced the outlook on China’s A1 debt rating to “negative” from “stable.” In the past, when a negative rating outlook is assigned to an issuer, roughly one-third of the issuers are downgraded within 18 months.

Given that indebted state companies and local governments represent “widespread downside risks to China’s fiscal, economic, and institutional strength,” Beijing probably needs to give them more assistance.

Increased risks associated with structurally and persistently slower medium-term economic growth and the continuous shrinkage of the real estate industry were also mentioned by Moody’s. The Finance Ministry of China expressed disappointment over the decision, stating that the property crisis and local government debt concerns were manageable and that the economy would recover.

Blue-chip stocks slumped nearly 2% to near five-year lows on growth worries, with some traders also citing speculation about Moody’s statement before its release.

China’s major state-owned banks, which had been supporting the yuan currency all day, stepped selling of U.S. dollars on the news. The cost of insuring China’s sovereign debt against a default rose to its highest since mid-November, while the U.S.-listed shares of heavyweight Chinese firms Alibaba and JD.com dropped 1% and 2%, respectively.

For now, markets are more concerned with the property crisis and weak growth, rather than the immediate sovereign debt risk.

Moody’s affirmed the A1 rating on Tuesday, noting that the economy still had a high shock-absorption capacity. It estimated China’s economic growth would slow to 4.0% in 2024 and 2025, and average 3.8% from 2026 to 2030.

S&P Global said later in a long-scheduled global outlook call that its big concern was that “spillovers” from any worsening in the property crisis could push China’s gross domestic product growth “below 3%” next year.

China’s government advisers are expected to call for more stimulus at the annual agenda-setting ‘Central Economic Work Conference’ due to be held in the next week or two.