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

  • Moody’s move raises pressure on the government to support markets
  • Analysts say confidence in Chinese assets could deteriorate further
  • Beijing’s measures to boost the economy have so far had a modest effect on markets

Shanghai/Hong Kong, Dec. 6 (Reuters) – Moody’s negative outlook on China has intensified Beijing’s battle with market bears, raising pressure on the government for stronger measures to stem sinking stocks and stabilize the yuan as investor confidence deteriorates.

In its Tuesday announcement, the ratings agency flagged weak growth prospects, amid growing global concerns that China’s economic miracle is over, leaving the world’s second-largest economy in the middle-income trap.

While keeping China’s sovereign rating at A1, Moody’s cut its outlook from stable to negative, citing rising municipal debt and property market woes. Such concerns have prompted other companies to draw comparisons with similar macroeconomic indicators before Japan’s “lost decades” of stagnation.

While China’s rising debt levels and overconfidence in assets have long been part of the conversation, the voice of a rating agency carried enough weight to renew a sell-off in Chinese assets and accelerate state bank activity in markets.

“It’s a financial war,” said Yuan Yue, founder and CIO of Water Wisdom Asset Management.

Moody’s move “will trigger an overseas reduction in Chinese assets and raise China’s financing costs, leading to a decline in asset quality.”

Authorities have taken economic support measures and targeted measures to prop up the stock market, including cutting stamp duty, slowing listings and getting state-backed funds to buy stocks.

In an apparent attempt to calm the market, the official Shanghai Securities News reported on Wednesday that China’s securities watchdog will promote reforms to attract more long-term capital to the market.

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Last week, state-owned China Reform Holdings Corp said it had started buying index funds to support the market, following a similar move by sovereign fund Central Huijin Investment.

But on the trade side, the weak prospects for the Chinese economy will be hard to shake as confidence is low.

“If the cost of insuring sovereign debt continues to rise and bailouts begin, pressures on Chinese stocks and the economy in general could increase,” said Ryan Yong, economist at the American Institute for Economic Research.

Rob Cornell, head of Asia-Pacific research at ING, said China had already used several tools to boost demand, but with little effect, “and it will be very difficult to regain public confidence in this market.”

Ultimately, analysts warn, sentiment will stabilize only if China provides a credible long-term roadmap to address the structural weaknesses limiting its growth potential.

“Consolidating growth momentum and increasing confidence for the future is China’s priority,” said Calvin Zhang, senior portfolio manager at Federated Hermes.

China needs to increase fiscal spending and address the hidden debt of local governments, Zhang said.

In October, China unveiled plans to issue 1 trillion yuan ($139 billion) in sovereign bonds by the end of the year, raising the 2023 budget deficit target to 3.8% of gross domestic product (GDP) from the original 3%.

Yuan concerns

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

Major state-owned banks also sold the US dollar heavily on Tuesday and Wednesday. China’s central bank has used a variety of tools to stem the yuan’s slide in recent months, including a strong peg before the market opens.

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However, the discharge pressure is high.

China posted its first quarterly deficit in July-September, while outflows from China hit $75 billion in September, the biggest monthly outflow since 2016, Goldman Sachs data showed.

Analysts said Moody’s outlook cut could lift stocks further.

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

Sovereign debt is the bedrock of Chinese assets, so the move “will certainly affect the yuan exchange rate, and reduce the risk appetite of global investors.”

But not everyone is rough.

Rival rating agencies Fitch Ratings and S&P Global Ratings left their respective China credit ratings unchanged. Fitch affirmed China’s A+ rating with a stable outlook in August, while S&P Global on Wednesday maintained China’s A+ rating with a ‘stable’ outlook.

Some market participants indicated that similar valuation moves in the US had limited long-term market impact.

“Just as most people have held off on a US downgrade, most investors will likely skip a China downgrade,” said Jason Hsu, chief investment officer at Rayliant Global Advisors.

Reporting by Samuel Shen and Winnie Cho in Shanghai and Summer Jen in Hong Kong; Ankur Banerjee in Singapore; Additional reporting by Megan Davis in New York; Editing by Marius Zaharia and Sri Navaratnam

Our Standards: Thomson Reuters Trust Principles.

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