SHANGHAI/HONG KONG, Dec 6 (Reuters) – Moody’s negative outlook on China intensifies the battle between the Chinese government and market bears, sending stocks in decline as investor confidence worsens. This has increased pressure on the government to take stronger measures to support and stabilize the yuan.
The ratings agency warned of weakening growth prospects in a statement on Tuesday, adding to global concerns that China’s economic miracle is over and the world’s second-largest economy could be stuck in a middle-income trap. is increasing.
Moody’s maintained China’s sovereign rating at A1, but downgraded the outlook from stable to negative, citing soaring local debt and struggling real estate markets. Such concerns have led other institutions to draw comparisons with similar macroeconomic conditions in Japan before the stagnation of the “lost decades.”
China’s rising debt levels and over-reliance on real estate have long been part of the debate, but the ratings agency’s voice could once again prompt a slide in Chinese assets and prompt state-owned banks to take action in the market. It had enough weight.
“This is a financial war,” said Yuan Yuwei, founder and CIO of Water Wisdom Asset Management.
Moody’s move “not only would cause a reduction in foreign holdings of Chinese assets, but would also increase China’s funding costs and potentially lead to a deterioration in asset quality.”
Authorities have taken a number of economic support measures and targeted measures to support the stock market, including cutting stamp duty, slowing the pace of listings and buying stocks through state-backed funds.
In an apparent effort to calm the market, the official Shanghai Securities News reported on Wednesday that China’s securities watchdog will push for reforms to attract more long-term funds to the market.
And last week, state-owned China Reform Holding Group announced it had started buying index funds to support the market, following a similar move by sovereign wealth fund Central Huijin Investment.
But on the other hand, the weakening outlook for China’s economy may prove difficult to shake off, as confidence remains low.
“If the cost of guaranteeing sovereign debt continues to rise and bailouts begin, pressure on Chinese stocks and the broader Chinese economy is likely to increase further,” said Ryan Yonk, an economist at the American Institute for Economic Research. Ta.
Rob Carnell, head of Asia-Pacific research at ING, said China is already using a number of tools to boost demand, but the effects have been limited, adding: “Regaining people’s confidence in this market will take a very long time.” It will be difficult.”
After all, sentiment can only be sustainedly stabilized if China presents a credible long-term roadmap to resolve the structural weaknesses that are holding back its growth potential, analysts say. I’m warning you.
“The priority for China now is to stabilize its growth momentum and increase confidence in the future,” said Calvin Zhang, senior portfolio manager at Federated Hermès.
Zhang said China should increase fiscal spending and address hidden debts of local governments.
In October, China announced plans to issue 1 trillion yuan ($139 billion) in national debt by the end of the year and raise its 2023 budget deficit target to 3.8% of gross domestic product (GDP) from 3%. .
original worry
China’s blue-chip stock index (.CSI300) hit its lowest level in nearly five years on Wednesday.
Major state-owned banks also strengthened their dollar selling very strongly on Tuesday and again on Wednesday. The People’s Bank of China has used a variety of measures in recent months to stem the yuan’s decline, including tightening settings before the market opened.
Still, outflow pressure remains high.
China recorded its first-ever quarterly deficit in foreign direct investment from July to September, but according to Goldman Sachs data, outflows from China in September reached $75 billion, with monthly outflows This was the largest amount since 2016.
Analysts said the stakes could be further raised by Moody’s forecast cut.
“This is a blow to already low investor confidence in China,” said Chi Wan, chief investment officer of Hong Kong asset management at UOB Kay Hian.
Since sovereign credit is the basis of Chinese assets, this move “will certainly impact the renminbi exchange rate and reduce the risk appetite of global investors.”
But not everyone is bearish.
Rival rating agencies Fitch Ratings and S&P Global Ratings have made no changes to their respective China credit ratings. Fitch affirmed China’s A+ rating in August with a stable outlook, while S&P Global on Wednesday said it maintained China’s A+ rating with a “stable” outlook.
Some market participants noted that a similar rating move for the United States would have limited long-term market impact.
“I think most investors will ignore the China downgrade, just like most people ignored the U.S. downgrade,” said Jason Su, chief investment officer at Rayliant Global Advisors. .
Reporting by Samuel Shen and Winni Zhou in Shanghai and Summer Zhen in Hong Kong. Uncle Banerjee of Singapore. Additional reporting by Megan Davis in New York.Edited by: Marius Zaharia and Sri Navaratnam
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