China's economy in turmoil as major rating agency mulls downgrade amid property crisis
China is at risk of being downgraded by the credit ratings agency Moody's amid an economic slowdown and property crisis in what could be a major blow to Xi Jinping.
Credit rating agency Moody’s cut its outlook for Chinese sovereign bonds to negative on Tuesday, citing risks from a slowing economy and a crisis in its property sector in what could be a major blow to President Xi Jinping.
Moody’s said the downgrade, its first for China since 2017, reflects risks from financing troubles of local and regional governments and state-owned enterprises.
The world’s second-biggest economy had been slowing before a 2020 crackdown on excessive borrowing brought on defaults by dozens of property developers. Those troubles have crimped local government finances and also imperiled some lenders, further dragging on the economy.
The need for government intervention to support banks and local governments poses "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," Moody’s said in a statement.
China’s Ministry of Finance said it was "disappointed" with Moody’s decision to lower the outlook.
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According to an online transcript of remarks at a Q and A session Tuesday, the ministry said: "Since the beginning of this year, in the face of the complex and harsh international situations, and against the background of an unstable global economic recovery and weakening momentum, China’s macro economy has continued to recover and has been advancing steadily."
Shares retreated in China on Tuesday, with Hong Kong’s Hang Seng dropping 1.9 percent and the Shanghai Composite index down 1.7 percent.
Separately, Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings.
The credit rating firm said it expects China’s economy to grow at a 4 percent annual pace in 2024 and 2025, slowing to an average of 3.8 percent for the rest of the decade.
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Factors such as "weaker demographics," as the country ages, will likely drive a decline in potential growth to around 3.5 percent by 2030, Moody’s said.
To offset the weaker property sector, China will need "substantial and coordinated reforms" to support more consumer spending and higher value-added manufacturing to support strong growth, Moody’s said.
China’s recovery from the COVID-19 pandemic faltered after an initial burst of activity earlier in the year faded faster than expected. Despite prolonged weakness in consumer spending and exports, the economy is expected to grow at about a 5 percent annual pace this year.
China’s economy still has "huge development resilience and potential" and will remain an important engine for global economic growth in the future, the Finance Ministry said.
