Ratings agency Moody’s Investors Service on Tuesday last week cut its outlook for China’s credit rating to “negative” from “stable,” citing risks from a slowing economy, increasing local government debts and a continued slump in the Chinese property market. Wasting little time, the agency on Wednesday also downgraded its credit outlooks for Hong Kong and Macau to “negative” from “stable,” citing the territories’ tight political, institutional, economic and financial linkages with China.
While Moody’s reaffirmed its “A1” sovereign rating for China, the outlook downgrade was its first for the country since 2017, reflecting the agency’s pessimistic view of China’s mounting debts and the effects on its economic prospects.
Moody’s lowered its economic growth forecasts of the world’s second-largest economy for next year and 2025 to 4 percent, compared with the Chinese government’s annual growth target of about 5 percent for this year. The agency also put its average growth estimate for China at about 3.8 percent by 2030, implying a similarly pessimistic outlook for the Chinese economy in the long term.
The assessment was consistent with Moody’s previous credit risk judgements and followed the same treatment it gave the US on Nov. 10. At that time, Moody’s lowered its outlook on the US’ credit rating to “negative” from “stable,” citing the continuous accumulation of US federal debts and a decline in Washington’s stability of debt repayment amid growing political polarization.
Moody’s shift in stance on China’s credit outlook has much to do with the country’s real-estate problems, which have not only triggered debt defaults by major property developers including Evergrande Group and Country Garden Holdings Co, but also delivered knock-on effects on local government debts and the national economy as a whole. On Sept. 14, the agency revised its outlook for China’s property sector to “negative” from “stable” and said it expected the market’s downside to continue over the next six to 12 months.
Fitch Ratings and S&P have not adjusted their credit outlooks for China yet, but they have issued warnings on the rising risks associated with the nation’s property market and are not optimistic about the economy’s growth momentum. That is because the property sector and related industries make up a quarter of China’s economic activity, they said.
Fitch last month forecast an up to 5 percent decline in China’s new home sales next year following an estimated contraction of 10 to 15 percent this year, amid sustained declines in transaction volumes and re-emerging pressure on home prices, while S&P on Oct. 24 said that in its worst-case scenario, China’s real GDP growth could drop to 2.9 percent next year if the property slump worsens.
In other words, the three major agencies all have similar views on China’s economic growth and property market trends, and they only differ on how badly the property woes could evolve to affect other key business sectors including capital goods, consumer products and banks, and China’s overall economy.
Given that Taiwanese banks and insurance companies have continued to slash their exposure to China to the lowest level in at least a decade, the Financial Supervisory Commission last week said the Moody’s downgrade had little effect on Taiwanese banks and insurers, as it claimed a combined exposure of NT$23.6 billion (US$752.22 million) to Chinese bonds as of the end of last month.
However, local financial institutions still have to pay extra attention to China’s property crisis and its local government debt problem, which are not likely to be solved in the short term. Instead, they need to be improved through structural reforms in the long term. It also requires Beijing to adopt broader macroeconomic policies to promote sustained economic growth.
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