Rating agency Moody's has downgraded China's credit rating outlook from "stable" to "negative," citing concerns over mounting debt and the potential for a financial crisis due to a slowing economy and a property market downturn.
The downgrade followed a similar downgrade to the U.S. remaining triple-A grade. Despite this, Moody's has maintained a long-term A1 rating for China's sovereign bonds. A1 is the agency's fifth-highest rating, which is in the top "upper medium grade." This means China is still safe to hold on to its "investment grade" score.
S&P and Fitch, the other two major global rating agencies, have assigned China an A+ rating, equivalent to Moody's A1. They also maintain stable outlooks for the country's creditworthiness.
While China's credit rating remains firmly within investment territory at A1, Moody's downgrade to a negative outlook signals a heightened risk of a rating downgrade within the next 18 months. Historically, about one-third of issuers experience a downgrade within this timeframe following a negative outlook assignment.
Moody's downgrade underscores growing concerns over the need for government intervention to support debt-laden local authorities and state-owned enterprises. This financial assistance could strain China's fiscal resilience and hinder its overall 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," Moody's said.
Moody's also anticipates a deceleration in economic growth. China's annual GDP is projected to reach 4.0 percent in 2024 and 2025, averaging 3.8 percent from 2026 to 2030.
S&P Global expressed heightened concerns about the potential ramifications of a worsening property crisis, suggesting it could drag China's GDP growth below three percent in 2024.
Responding to the downgrade, China's Finance Ministry expressed disappointment. They asserted that the economy is on a robust recovery track, with the property and local government risks remaining controllable. The ministry also believes the country's financial stability remains intact.
China's economic rebound has lost steam this year following an initial surge driven by coal exports to replace banned Russian gas. Most analysts expected growth to meet the government's target of around five percent, but the activity has been too uneven.
The country's recovery has also been hampered by the housing crisis, local government debt, slowing global growth and geopolitical tensions.
Various policy support measures have been modestly beneficial, but they also intensify pressure on authorities to roll out more robust stimulus measures.
State-owned banks buoy China's economy
China's major state-owned banks actively intervened in forex markets on Tuesday, buying yuan to counter the potential weakening triggered by Moody's downgrade. Sources familiar with the matter revealed that state banks had engaged in yuan-dollar swaps and promptly offloaded the acquired dollars in the spot market to support the yuan throughout the trading session.
These state banks usually act as intermediaries for the central bank in the foreign exchange market, but they also engage in independent trading activities.
The yuan has had a volatile year, initially weakening by 6.14 percent against the dollar before recouping some losses due to views that U.S. interest rates have peaked. In November, the yuan surged by 2.55 percent, its best month in 2023, yet remains down three percent year-to-date.
Chinese state banks resumed selling dollars on Wednesday to support the yuan. However, the intervention was relatively mild as exporters settled and converted their foreign exchange receipts, which helped the currency recover.
Despite efforts to prop up the currency, the yuan continued its downward trajectory. Spot yuan opened at 7.1570 per dollar and was trading at 7.1568 as of 03:00 GMT, marking an 88-pip decline from the previous late session close. Offshore yuan traded at 7.1641 per dollar around the same time.