Vantage | Why Moody's downgrade hurt China and its markets so badly

Of late, China’s economic landscape has been rattled by a devastating tsunami in the form of a report from the renowned ratings agency, Moody’s. The agency’s downgrade of China’s economic outlook has sent shockwaves through global markets prompting a mass exodus of investors and raising questions about the fundamental health of the world’s second-largest economy.

Moody’s downgrade and Beijing’s response Moody’s assessment, which downgraded China’s economic prospects, has prompted Beijing to downplay the severity 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. However, despite the verbal reassurances the market response has been swift and severe. Investors have swiftly reacted to Moody’s report, leading to a significant sell-off in Hong Kong. Companies listed on the Hang Seng Index are experiencing a beating, with some nearing a 13-month low. Union Bancaire Privee, 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. Yuan’s struggles and government intervention The Chinese yuan has faced challenges in the aftermath of the downgrade, experiencing a two-day decline in value. In response, the Chinese government has intervened by instructing state-owned banks to defend the yuan. These banks have been actively selling US dollars from their reserves and buying yuan from foreign exchanges. Amid the economic turmoil, China released export data for November, showing growth for the first time in six months. However, this positive headline is seen as a silver lining amidst a deluge of bad news. Moody’s report confirmation Moody’s report serves as an indictment, confirming what experts have long suspected – China’s economy faces fundamental problems akin to a lingering illness. The symptoms persist and the available remedies appear ineffective, raising concerns about the long-term stability of China’s economic growth. Reports suggest that Moody’s officials took precautions before releasing the assessment by instructing their staff in China to work from home, anticipating a potential government backlash. This adds to the growing list of challenges faced by foreign companies in China, where adverse reports on the economy could make them more vulnerable to scrutiny. The intensified scrutiny on foreign companies aligns with Beijing’s strategy to control the narrative on China’s economy. Recent raids and detentions of companies, including Foxconn, Capvision, Brain and Company and Mintz Group reflect the government’s efforts to muzzle critics and prevent accurate data from flowing out. Financial challenges and debt burden China is grappling with a significant debt burden, particularly at the local government level, estimated between $7 to $11 trillion. A substantial portion of these loans is classified as high risk with estimates suggesting a value between $400 and $800 billion. The lack of transparency in China’s data makes it challenging to ascertain exact figures. In response to the financial crunch, China has taken an unconventional approach by issuing more debt rather than implementing common sense measures such as cutting expenses and negotiating debt terms. Local governments have sold a record number of special bonds, raising over $21 billion to save struggling small and medium banks. China’s economic tsunami triggered by the Moody’s downgrade reveals deep-rooted challenges in the country’s financial system. With a fragile financial structure heavily reliant on continuous borrowing, the risk of a default looms large with potential consequences extending far beyond China’s borders. As the world watches China navigate these economic challenges, the global impact remains uncertain. Views expressed in the above piece are personal and solely that of the author. They do not necessarily reflect Firstpost’s views. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.