China Debt Outlook: Moody's Cuts To Negative As Property Crash Continues To Weigh

Ratings agency Moody’s cut its outlook on China’s credit rating to negative on Tuesday, saying the country faces an economic slowdown as it continues to grapple with the fallout from the collapse in its property sector.

Moody’s rating reflected growing signs that debt issuance will be increased as financial support is provided to financially-stressed regional and local governments and state-owned enterprises, “posing broad downside risks to China’s fiscal, economic and institutional strength.”

The rating agency added: “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.”

Market Reaction

The yield on China’s benchmark 10-year bond rose 32 basis points to 2.701%. Back in January, the yield hit a year high of just below 3%. The VanEck China Bond ETF CBON rose 0.5% in pre-market trade. During November the CBON rose 3%.

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Moody’s said it had changed the outlook from stable to negative on China’s government credit ratings, but affirmed its A1 long-term credit rating. The affirmation of the A1 rating reflected “China’s financial and institutional resources to manage the transition [to a more balanced economy] in an orderly fashion.”

U.S. listed exchange traded funds tracking Chinese real estate were broadly lower in pre-market trading. Global X MSCI China Real Estate ETF CHIR was down 0.3% — however, it has fallen 30% since the start of year.

Chinese property companies with listings or American Depository Receipts listed in New York were mixed. Hopes that more central government funding will reach them, saw some share prices creep higher, with China Resources Land ADRs (CRBJY) up 0.8% and Sun Hung Kai Properties (SUHJY) Ltd up 0.2%. Both, however, remained heavily down on the year.

Property Crash Has Far Reaching Impact

Last month data underlined the continuing slump in China’s real estate sector with property investment dropping by 9.3% year-on-year.

Last week, China’s central bank governor Pan Gongsheng warned that China’s economy faced a tough period ahead as it transitions from traditional areas of growth, such as property and infrastructure, to a more mature model of economic growth.

The bottom line suggests that the days of double-digit annual growth are over. Some economists forecast that 4%-5% annually would be more realistic.

Thus, as Moody’s suggested, central government will now have to spend more supporting regional and local governments which — during the last two decades — had relied heavily on revenues from selling land to support the property boom as citizens relocated from rural areas to cities.

Following the ratings move by Moody’s on Tuesday, China’s finance ministry issued a statement to voice its “disappointment” about the decision.

“China's macroeconomy continues to recover and high-quality development is steadily advancing. It is unnecessary for Moody's to worry about China's economic growth prospects and fiscal sustainability,” the ministry said.

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