Moody's outlook cut complicates Beijing's 'war' against market bears
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[December 06, 2023] SHANGHAI/
HONG KONG (Reuters) - Moody's negative outlook on China has intensified
Beijing's battle with market bears, raising pressure on the government
for more forceful measures to prop up sinking stocks and stabilize the
yuan as investor confidence deteriorates.
In its Tuesday announcement, the ratings agency flagged weakening growth
prospects, adding to mounting global concerns that China's economic
miracle is over, potentially leaving the world's second-largest economy
stuck in a middle-income trap.
While keeping China's sovereign rating at A1, Moody's cut its outlook to
negative from stable, citing surging municipal debt and property market
woes. Such concerns have prompted other institutions to draw comparisons
with Japan's similar macroeconomic symptoms before its "lost decades" of
stagnation.
Even though China's rising debt levels and over-reliance on property
have long been part of the conversation, the voice of a ratings agency
carried enough weight to renew a sell-off in Chinese assets and prompt
state bank actions in markets.
"This is a financial war," said Yuan Yuwei, founder and CIO of Water
Wisdom Asset Management.
Moody's move "would trigger foreign reduction in Chinese assets, and
would also push up China's funding costs, potentially leading to
deterioration in asset quality."
Authorities have taken a raft of economic support measures and targeted
steps to prop up the stock market, including cutting stamp duty, slowing
the pace of listings and getting state-backed funds to buy stocks.
In an apparent effort 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 into the market.
And 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 other side of the trade, the weakening prospects for the
Chinese economy could prove hard to shake off as confidence remains low.
"The pressures on Chinese stocks and the economy more generally are
likely to increase if the cost of insuring the sovereign debt continues
to rise and bailouts begin," said Ryan Yonk, economist at the American
Institute for Economic Research.
Rob Carnell, Asia-Pacific Head of Research at ING said that China has
used many tools already to drive up demand but with limited effect, "so
getting people to regain confidence in this market is going to be really
hard."
Ultimately, analysts warn, sentiment can only stabilize sustainably if
China delivers a credible longer-term roadmap for solving the structural
weaknesses that are curbing its growth potential.
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People walk at a shopping compound in Beijing, China December 6,
2023. REUTERS/Tingshu Wang
"The priority for China now is to stabilize growth momentum and
raise confidence for the future," said Calvin Zhang, senior
portfolio manager at Federated Hermes.
China should increase fiscal spending and address local governments'
hidden debt, Zhang said.
In October, China unveiled a plan 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 WORRIES
China's blue-chip index hit its lowest level in nearly five years on
Wednesday.
Major state-owned banks also stepped up U.S. dollar selling very
forcefully on Tuesday, and again on Wednesday. China's central bank
has used various tools in recent months to stem the yuan's slide,
including stronger fixings before the market open.
Still, outflow pressure remains high.
China recorded its first-ever quarterly deficit in foreign direct
investment in July-September, while Goldman Sachs data showed
outflows from China reached $75 billion in September, the biggest
monthly exodus since 2016.
Moody's outlook cut could raise the stakes further, analysts said.
"This is a blow to the already low investor confidence in China,"
said Qi Wang, chief investment officer of UOB Kay Hian's wealth
management division in Hong Kong.
Sovereign credit is the foundation of Chinese assets, so the move
"would certainly impact the yuan exchange rate, and reduce global
investors' risk appetite."
But not everyone is bearish.
Rival ratings agencies Fitch Ratings and S&P Global Ratings have
made no changes to their respective China credit ratings. Fitch
affirmed China's A+ rating with a stable outlook in August, while
S&P Global said on Wednesday it has retained China's A+ rating with
a 'stable' outlook.
Some market participants pointed to similar rating moves on the
United States as having limited long-term market impact.
"Just as most people shrugged off the U.S. downgrade, most investors
will shrug off the China downgrade," said Jason Hsu, chief
investment officer at Rayliant Global Advisors.
(Reporting by Samuel Shen and Winni Zhou in Shanghai and Summer Zhen
in Hong Kong; Ankur Banerjee in Singapore; additional reporting by
Megan Davies in New York; Editing by Marius Zaharia and Shri
Navaratnam)
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