By Anjan Roy
One of the most powerful global credit agencies, Moody’s, has downgraded China’s economic outlook to negative from stable. This has major implications for a country in the financial markets and as a reliable destination for global investors.
Immediately, this change might not affect China’s investments or borrowings. But a downward revision of outlook is a matter of prestige for a country. It implies that the prospects for the Chinese economy are none too bright and that could stall flow of fresh funds into China.
China’s finance ministry has contested the Moody view and pointed out that China has reserves of finance and reforms could be launched to give fresh boost to the country’s economy.
Admittedly, Moody’s has not as yet cut China credit rating. It has retained A1 rating for its sovereign bond rating, meaning that such bonds are good investments and could be repaid. Credit rating change is an indicator that the entity concerned might not be in a position to repay its borrowings.
Moody, one of the two global credit rating agencies whose words are taken as gospel truth by investors and lenders, influence a lot the rate at which an entity (that is a commercial body) or a country could borrow. A lower rating would obviously attract higher interest rate.
The immediate provocation for Moody’s to revise China’s outlook in the immediate future are several adverse trends noticed for sometime. The most important factor is the deep slide in China’s property market and its implication for the financial health of the country.
As such, overall growth of the economy has slackened. China had grown by world-beating pace for decades at 8% or above. The fast paced development has reportedly lifted hundreds of millions of people from below abject poverty to economic well-being. The middle class has surged and is one of the largest in the world.
However, since the pandemic the economy is slowing down. The draconian lock-downs implanted under the direction of the country’s supreme leader, Xi Jinping, had literally strangled the economic activity in all spheres. It had crippled many sectors and the human costs have been huge. It was only after large scale protests in different provinces that the top leaders saw the extent of the damage and some corrective measures were taken.
But then, the opening up has been as much abrupt and bewildering as the lock down stringencies. The sudden withdrawal of all restrictions and carefully crafted segregation had resulted in a fresh spurt in covid cases. The early deaths from covid as well as those after opening up imposed a telling cost on the country’s economy..
Like in some cases for individuals, China is suffering from the after effects of a long covid. The symptoms of a longer term impact from the covid excess are apparent. The growth rate of 8% and above has sagged to less than 3.5% in between in the immediate aftermath of the pandemic. But now, growth is reviving albeit haltingly.
Moody’s has projected China to grow just about 4% in both 2024 and 2025, and average at 3.8% a year from 2026 to 2030. Structural factors, including weaker demographics, could drive a decline in potential growth to around 3.5% by 2030, it added. Officially, China hopes to grow by 5% during the current year.
A sudden deceleration in growth means a shock to domestic demand. In the absence of the robust growth of exports, due to global slackness and an adverse geo-political environment, China was hoping to kick up domestic consumption demand and thus surge on the back of domestic demand. IN its new strategy, that should have compensated for sagging exports. However, that is not exactly what is happening..In one critical sector of Chinese economy, demand has abruptly gone down
The real estate and housing construction industry constituted almost a third of the country’s economy. The massive construction boom seen in the past has been fuelling the domestic economy with additional demand for everything from cement, steel, other construction materials to sectors like electrical goods to furniture.
For years, China has built new towns and cities across the country. In fact, this has buoyed up the economy ever since the Chinese economy opened up and began its ambitious reforms programme. Increasing urbanisation and house purchases acted as a lubricant for a large sector of China industry.
But, there is a limit to buying new homes and commercial properties. Reports have been trickling in of new towns with residential houses lying unoccupied and vacant. The country has ghost towns and empty housing estates all across. This was a case where the same economic growth trigger has been overexploited and for years.
A series of high flying real estate and construction industries have gone under. As real estate prices slumped under pressure from excess housing and commercial property stock, the biggest developers came under pressure. The biggest of these companies, Country Garden, had payments problems and could not honour commitments. Some others followed suit.
Their failures had resulted in widespread protests and sit-ins across provinces. For a dictatorial regime, such spectacles were abominable. Many of these protestors were removed by police or shut out from public views. Nonetheless these had left their mark and further accentuated the confidence in the economy. The crisis in the housing and real estate sectors had collateral damages spiralling into larger spheres.
China has a massive non-banking financial sector, which is called the “shadow baking sector”. These are, like India’s large NBFCs, somewhat informal in nature and provides the grist to the overall mill. They provide finance to consumers as well as other corporates.
Many of these Chinese NBFCs have large exposure to the real estate and housing sector. They are the aggregate purchasers of large property stocks as well as provider of funds to the property sector corporates. A trouble in the property firms means trouble for the NBFC or the banking sector. Only last week, China’s largest NBFC had gone down under.
The whole situation is morphing into building up of a financial sector crisis. To tell the truth a financial sector crisis is the worst nightmare in that these financial sector entities have link-up throughout the economy. If the financial sector is in trouble, these are transmitted fairly fast into the real economy.
Something like this is happening. The troubled housing and real estate sectors have stopped buying fresh lands from the Chinese local governments and municipalities. These bodies had depended heavily on their sales of land stock to these builders and promoters of new township. Once the sources for funds from sale of lands snapped for the municipalities and local bodies, their finances have got choked up.
The central government has proposed several rescue measures for the troubled real estate companies as well as the government as to bail out the beleaguered local governments. That means the government’s fiscal situation could become more leveraged.
In fact, one of the reasons cited by Moody’s for its downgrading of the economic outlook is a possible threat to fiscal situation of the Chinese federal government. But then, as the Chinese finance ministry has claimed, it has a massive treasure chest to draw upon. It is promising to introduce fresh reforms and release massive doses of funds to the real estate companies to tide over the current crisis. Maybe, that is true.
But the fundamental approach of these Chinese authorities to for ever pump up the economy through artificial creation of capacity is bound to run into problem some time or other. That’s why Chinese high growth period is over for the time being, tough the country will be continue to remain the second largest economy of the world, retaining its position much above India. (IPA Service)
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