Moody’s Is Doubtful That China’s Economy Can Balance Out Its Debt

Moody’s Is Doubtful That China’s Economy Can Balance Out Its Debt
Theodora Lee Joseph, CFA

3 months ago2 mins

What’s going on here?

Ratings agency Moody’s just downgraded China’s credit outlook to negative, doubtful that the weakening economy can balance out heavy debt.

What does this mean?

China’s embattled property market has been weighing on the economy ever since the government cracked down on the sector’s debt two years ago. Evergrande’s infamous default led to cracks across the industry, which, in turn, undermined everyday savers’ confidence in the value of their homes. And because that’s most folks’ biggest asset, Chinese shoppers have been curbing their economy-fueling spending and saving instead. What’s more, global economies – contending with inflation and inflation-fighting interest rates – are ordering less from China’s factories. Take all that together, and you can see why Moody’s doubts China’s ability to bring home the bacon and pay off its piling debts.

China borrowing

Why should I care?

For markets: Markets can be a step ahead.

Moody’s targeted the US last month, citing the government’s eye-watering borrowing as a reason to downgrade its credit outlook. But just like with China, a worse outlook doesn’t mean that a country’s credit rating is automatically lower – in fact, it’s pretty rare for the rating itself to be downgraded. Mind you, when markets catch wind of a possible downgrade, they can fall pretty fast. That's worth keeping in mind, because by the time the downgrade actually comes, most investors will have probably factored it all in anyway.

Zooming out: Everyone needs something to aspire to.

China is expected to announce its economic targets for next year later this month, which investors will use to measure the country’s progress going forward. Problem is, it would take a miracle to resolve the property market’s problems anytime soon, so China needs to find another industry capable of pumping money into the economy. Or, more likely, it’ll have to borrow cash to get the job done itself.

China growth target
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