Moody's, the credit rating agency, decided to downgrade the Chinese government's credit rating from stable to negative on Tuesday. It is the latest sign of growing global concerns about the impact of rising local government debt and a growing real estate crisis affecting the world's second-largest economy.
The decline reflects growing evidence that authorities need to provide more financial support for indebted local governments and state-owned companies. This is because it poses an overall risk to China's fiscal, economic, and institutional strength, Moody's said in a statement.
China's blue-chip stocks fell to near five-year lows on Tuesday on worries about the country's growth, with rumors of a downgrade by Moody's eroding sentiment throughout the session, while Hong Kong shares continued to slide.
Big Chinese state-owned banks, which were seen as supporting the yuan throughout the day, stepped up selling of the US dollar after Moody's statement, one of the sources said. The yuan remained unchanged in the afternoon.
Debt protection costs related to China's bankruptcy rose to the highest level since mid-November. "Now the market is more worried about the real estate crisis and weak growth, rather than the immediate sovereign debt risk," said Ken Cheung, chief Asia FX strategist at Mizuho Bank in Hong Kong. .
Moody's move is the first change in China's outlook since it downgraded its rating by one notch to A1 in 2017, also citing expectations of slower growth and rising debt.
Although Moody's maintained China's A1 foreign and producer ratings on Tuesday, Moody's said the economy still has resilient capacity, expecting the country's annual GDP growth to slow to 4.0% in 2024 and 2025, and average 3.8% from 2026 to 2030.
Analysts however said the A1 rating was already high enough in the investment area and this downgrade was unlikely to trigger forced selling by global funds. The other two major rating agencies, Fitch and Standard & Poor's, rate China. Both have stable views.
China's Ministry of Finance said it was disappointed by Moody's decision, adding that the economy will maintain its recovery and trend positively. It also said real estate and local government risks are manageable.
"Moody's concerns about economic growth prospects, financial sustainability, and other aspects are unnecessary," said the ministry.
