Moody’s cut outlook complicates Beijing’s ‘war’ on market bears

  • Moody’s move increases pressure on the government to do more to support markets
  • Confidence in Chinese assets could deteriorate further, analysts said
  • Beijing’s moves to boost the economy and markets have so far had only a modest impact

SHANGHAI/HONG KONG, Dec 6 (Portal) – Moody’s negative outlook on China has intensified Beijing’s battle against market bears and increased pressure on the government to take stronger measures to support falling stocks and stabilize the yuan as investor confidence weakens .

In its announcement on Tuesday, the ratings agency pointed to a weakening growth outlook, adding to growing global concerns that China’s economic miracle is over and the world’s second-largest economy may be stuck in a middle-income trap.

While Moody’s left China’s sovereign rating at A1, Moody’s cut its outlook from stable to negative, citing rising municipal debt and problems in the real estate market. Such concerns have led other institutions to draw comparisons with Japan’s similar macroeconomic symptoms before its “lost decades” of stagnation.

While China’s rising debt and overreliance on real estate have long been the subject of debate, the voice of one credit rating agency carried enough weight to trigger another sell-off in Chinese assets and trigger action by state banks in the markets.

“This is a financial war,” said Yuan Yuwei, founder and CIO of Water Wisdom Asset Management.

Moody’s move “would trigger a reduction in Chinese assets abroad and also drive up China’s financing costs, potentially leading to a deterioration in asset quality.”

Authorities have taken a range of economic support measures and targeted measures to support the stock market, including cutting stamp duty, slowing initial public offerings and providing government-backed funds to buy shares.

In an apparent attempt to calm the market, the official Shanghai Securities News reported on Wednesday that China’s securities regulator would push forward reforms to attract more long-term capital into the market.

And last week, state-owned China Reform Holdings Corp said it had started buying index funds to support the market, after sovereign wealth fund Central Huijin Investment made a similar move.

On the other hand, however, the weakening outlook for the Chinese economy may be difficult to shake off as confidence remains low.

“Pressure on Chinese stocks and the broader economy will likely increase as the cost of hedging government debt continues to rise and bailouts begin,” said Ryan Yonk, an economist at the American Institute for Economic Research.

Rob Carnell, head of Asia-Pacific research at ING, said China had already used many tools to boost demand, but with limited impact, “so it will be really difficult to get people to have confidence again.” to win back this market.”

Ultimately, analysts warn, sentiment can only stabilize sustainably if China presents a credible longer-term roadmap to address the structural weaknesses that are holding back its growth potential.

“The priority for China now is to stabilize growth momentum and boost confidence going forward,” said Calvin Zhang, senior portfolio manager at Federated Hermes.

China should increase government spending and address local governments’ hidden debts, Zhang said.

In October, China unveiled a plan to issue 1 trillion yuan ($139 billion) of government bonds by the end of the year, raising its 2023 budget deficit target to 3.8% of gross domestic product (GDP) from an initial 3%.

YUAN WORRY

China’s blue-chip index (.CSI300) hit its lowest level in nearly five years on Wednesday.

The large state banks also increased their US dollar sales very sharply on Tuesday and again on Wednesday. China’s central bank has used various tools in recent months to contain the yuan’s decline, including tighter fixings before markets open.

Nevertheless, the outflow pressure remains high.

China posted its first quarterly foreign direct investment deficit in July and September, while data from Goldman Sachs showed outflows from China reached $75 billion in September, the largest monthly outflow since 2016.

Analysts say Moody’s lowering its outlook could raise the stakes even further.

“This is a blow to already low investor confidence in China,” said Qi Wang, chief investment officer of UOB Kay Hian’s asset management division in Hong Kong.

Government loans are the basis of Chinese assets, so this move would “certainly affect the yuan exchange rate and reduce the risk appetite of global investors.”

But not everyone is pessimistic.

Rival rating agencies Fitch Ratings and S&P Global Ratings have not changed their respective credit ratings for China. Fitch affirmed China’s A+ rating with a stable outlook in August, while S&P Global said on Wednesday that it maintained China’s A+ rating with a “stable” outlook.

Some market participants noted that similar rating changes in the United States would have limited long-term impact on the market.

“Just as most people shrug off the U.S. downgrade, most investors will shrug off the China downgrade,” said Jason Hsu, chief investment officer at Rayliant Global Advisors.

Reporting by Samuel Shen and Winni Zhou in Shanghai and Summer Zhen in Hong Kong; Ankur Banerjee in Singapore; additional reporting by Megan Davies in New York; Edited by Marius Zaharia and Shri Navaratnam

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