Of late, prestigious financial credit rating agency Moody’s has been critical of China’s sinking economy. Moody’s in 2024 has downgraded the rating of 17 Chinese local government financing vehicles (LGFV) by one notch and immediately put them back on another downgrade warning by setting the rating outlooks to “negative”.
The 17 LGFVs downgraded were: Changde Economic Construction Investment Grp Guangxi Communications Investment Grp Co.,Ltd Sino Trendy Investment Limited, Henan Railway Const. & Inv. Group Co Ltd Meixihu Investment (Changsha) Co., Ltd., Lhasa City Construction InvtMgmt Co., Ltd., Yi Bright International Limited, Shandong Land Development Group Co., Ltd., and Shuifa Group Co., Ltd.
This latest report from Moody has been devastating for the local entrepreneurs as most of the investors have started to swiftly disengage from the world’s second largest economy. Xi Jinping’s local governments, which between them have more than $9 trillion debt, have seen their finances crumble in recent years as the country’s suffers from crash in property market making it harder for them to build capital by selling land.
Moody’s report further triggered a mass sell-off in Hong Kong’s Hang Seng Index. Many firms listed on the Hang Seng Index experienced a downslide as some witnessed a 13-month low trading results. Union BancairePrivee, senior Asia economist, Carlos Casanova attributes this market correction to fragile sentiment over the past three years where negative headlines trigger strong reactions in equity markets.
“I think sentiment has been extremely fragile over the past three years and we see investors reacting quite strongly to any negative headlines. So you saw equity markets, in particular, correcting very strongly,” said Casanova.
Moody’s had put the 17 LGFV from China on watch in early December when it put China’s sovereign rating on a “negative outlook” and January 2024 it has once again sliced the rating by one notch. The renewed negative outlooks is indicative of the fact that as per Moody’s the governmental capacity to support (GCS) score of their respective regional and local government (RLG) owners has weakened drastically. Moody’s has left the ratings of nine other Chinese LGFVs unchanged but still had to cut their outlooks to negative due to the current financial downslide.
A report by the International Monetary Fund (IMF)states that China’s LGFV has an estimated debt of 66 trillion yuan ($9.1 trillion) and this amount was used to raise capital for infrastructure projects important to boost the country’s development.
Moody’s explanation to the cut to China’s sovereign rating was that it could sense a downgrade of economy as well as a material weakening of the RLG owners’ finances, or the governments’ inability to restructure a timely support system. Another reason was that Beijing started to prohibit local governments from providing financial support to LGFVs, or if changes occur in the LGFVs’ characteristics that could weaken local governments’ propensity to support, such as diminished roles in key public projects.
The Chinese yuan too has faced a two-day decline in its value. The world knows how China has pitted its currency yuan against the US’ dollar and wants it to be a globally traded currency. But Moody’s negative rating has prompted China to instruct all state-owned banks to defend yuan by selling all US dollars from their reserves and buying yuan from foreign exchanges.
The only silver lining for China amid the barrage of bad news is the positive growth for the first time in the six months.
Moody’s report further drills down on the basic problems Beijing is facing that included ineffective policies, stringent business norms, property crisis, and defaulting companies that led to the economic crisis. Moody’s was also aware that China would retaliate after they released the assessment and asked its staff operating from China to work from home. There has already been a mass exodus of foreign companies operating in China and after the negative outlook rating Chinese officials would further scrutinise the remaining foreign companies to control the narrative on China’s economy. Recent raids and detentions of companies, including Foxconn, Capvision, Brain and Company and Mintz Group reflect Beijing’s tactics to use force and create a rosy picture of China and prevent the accurate data from coming out.
Moody’s assessment has come down hard on China’s economic status but Beijing has downplayed the criticality of the situation.
“The fundamentals of China’s long-term economic growth have not and will not change. We are confident and capable of achieving long-term stable development, said Chinese Foreign Ministry spokesperson Wang Wenbin. These verbal assurances coming from the Chinese government are futile as the market is shaken badly and will take some time to recuperate.