Stock markets in Hong Kong and mainland China slumped after Moody’s downgraded its outlook on the Chinese government’s credit ratings to “negative” from “stable” on Tuesday.
The Hang Seng Index, Hong Kong’s stock market benchmark, fell 1.9% to close at 16,327 on Tuesday, the lowest since November 2022. The Shanghai Composite Index dropped 1.7% to 2,972, breaking the psychological support of 3,000 again since October this year.
Although Japan’s Nikkei 225 also declined 1.37% on Tuesday due to investors’ worries about the slowing economy in Asia, the index has increased 27.5% so far this year. The Hang Seng Index has fallen 19% while the Shanghai Composite Index has decreased 4.63% in 2023.
Moody’s on Tuesday affirmed China’s A1 long-term local and foreign-currency issuer ratings but it downgraded its outlook on China’s government credit ratings to negative, citing the country’s lower medium-term economic growth and ongoing downsizing of the property sector.
The change “reflects rising evidence that financial support will be provided by the government and wider public sector to financially stressed regional and local governments and state-owned enterprises,” Moody’s said.
It said this trend was “posing broad downside risks to China’s fiscal, economic and institutional strength.”
“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” it added.
Manageable impact
China’s Ministry of Finance said in a statement that it is “disappointed” by Moody’s downgrade of ratings outlook.
“Moody’s concerns about China’s economic growth prospects, fiscal sustainability and other aspects are unnecessary,” it said.
“When our land revenue decreases, our expenses in relocation compensation will also fall,” it said. “In recent years, although our property-related tax revenue has dropped, its ratio in our public income has not significantly declined.”
It said the impact of the downturn in the property market on local general public budgets and government budgets is manageable and structural.
“Our country has established an institutional system to prevent and resolve local government debt risks in recent years,” it said.
It said the spread and expansion of illegal and disorderly borrowing by local governments has been initially curbed, and positive results have been achieved in the disposal of local government debts.
At the end of last year, the outstanding local debt amounted to 62 trillion yuan (US$8.68 trillion), which included the local governments’ debt of 35.1 trillion yuan and the central government’s debt of 25.9 trillion yuan.
The finance ministry said China’s local debt to GDP ratio was only about 50.4%, below the internationally-accepted 60% warning line and the level seen in major economies and emerging market countries.
The official local debt figure did not include the local government financing vehicle (LGFV) debt, which was estimated by analysts at about 60 trillion yuan at the end of 2022.
If the LGFV debt is included, China’s debt-to-GDP ratio should be 99%, compared with Japan’s 263.9% and the United States’ 129%.
Slowing economy
Moody’s said it expects the country’s annual GDP growth to be 4% in 2024 and 2025 and average 3.8% from 2026 to 2030.
The Economic Daily, a state-owned newspaper, on Tuesday said the cutting of China’s credit outlook by Moody’s is “unwarranted and flawed.”
Feng Qiaobin, deputy director of macroeconomic research at the Development Research Center of the State Council, was quoted as saying in the report that Moody’s failed to have a deep understanding of the Chinese economy and did not take into consideration the country’s most recent policy support to the property market and the effects to be delivered.
In March, China set a 5% economic growth target for 2023.
On October 18, the National Bureau of Statistics (NBS) said China’s GDP grew 5.2% in the first three quarters of this year from a year ago.
Among the “three horses” of the Chinese economy, consumption grew 6.8%, external trade in US dollars fell 6.4% and fixed-asset investment rose 3.1% for the period.
The 3.1% growth in the fixed-asset investment was contributed by a 7.2% increase in investment made by state-owned-enterprises. Private investment fell 0.6% year-on-year during the first nine months.
“The contribution of domestic consumption to China’s economic growth continues to increase,” the finance ministry said Tuesday.
It said consumption and investment drove GDP growth by 4.4 and 1.6 percentage points, respectively. However, external trade dragged GDP growth by 0.8 percentage points.
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