China’s blue-chip stocks experienced a significant downturn, reaching nearly five-year lows on Wednesday, accompanied by a decline in the yuan currency. The market reaction was prompted by Moody’s (NYSE:MCO) downgrade of China’s credit outlook, intensifying concerns about the country’s economic recovery.
Moody’s issued a warning on Tuesday, indicating a potential downgrade to China’s credit rating. The agency highlighted the costs associated with bailing out local governments and state-owned enterprises, along with managing the ongoing property crisis, as factors that could exert downward pressure on the world’s second-largest economy.
Chinese markets opened with the CSI300 Index hitting its lowest level since February 2019 before partially recovering. By midday, the CSI300 Index showed a 0.2% increase, while the Shanghai Composite Index experienced a 0.1% decline.
Throughout the year, Chinese markets faced challenges, including a fragile economic recovery, a deepening property crisis, and geopolitical tensions, especially the prolonged disputes between China and the United States over technology and trade. The CSI300 Index has witnessed a 12.2% decline year-to-date, positioning it as one of the worst-performing indices in the region.
Conversely, the Hang Seng Index rebounded by approximately 0.7% in morning trade, with notable gains led by the technology sector.
Pang Xichun, Research Director at Nanjing RiskHunt Investment Management Co., remarked, “The CSI300 index was hit the hardest in terms of valuation, as the index gets more allocations from foreign investors. Adding the impact of Moody’s cut, the index may find a bottom and rebound soon.”
Foreign capital recorded a net inflow via the northbound trading link by midday, following three consecutive sessions of outflows.
Yasser El-Shimy, an investment analyst at The Motley Fool, commented, “Moody’s decision to downgrade its outlook on China’s debt is the latest link in a long string of recent disappointments for investors in Chinese equities.”
China’s economic recovery, which initially showed signs of strength at the beginning of the year, has displayed indications of losing momentum. Factors contributing to this deceleration include challenges in the housing market, risks associated with local government debt, and a sluggish global economic growth trajectory.
Fragile Yuan:
In the currency market, China’s yuan experienced a decline against the dollar on Wednesday, despite continuous efforts by major state-owned banks to stabilize the currency. The People’s Bank of China (PBOC) extended its practice of setting daily guidance at levels stronger than market projections, signaling official attempts to maintain currency stability.
The PBOC set the midpoint rate, around which the yuan is allowed to trade, at 7.1140 per dollar before market opening on Wednesday. While this was 13 pips weaker than the previous fix of 7.1127, it remained 336 pips firmer than Reuters’ estimate of 7.1476.
Maybank analysts noted, “The strong yuan fix continues to convey a message of support for the yuan as domestic demand remains fragile, and China’s property market continues to struggle to find a foothold.”
The spot yuan rate opened at 7.1570 per dollar and was trading at 7.1578 at midday, indicating a 98 pips weakening compared to the previous late session close.
Major state-owned banks in China escalated U.S. dollar selling after Moody’s statement on Tuesday, and this trend continued on Wednesday morning, as reported by Reuters.
The yuan has experienced volatility throughout the year, initially weakening by 6.14% against the dollar before recovering some losses. Growing speculations about the peaking of U.S. interest rates contributed to the yuan’s rebound. Although the yuan strengthened by 2.55% in November, marking its best month of the year, it remains down by 3.6% year-to-date.
Global Ratings Agencies’ Response:
While Moody’s took a negative stance, other global ratings agencies, Fitch Ratings, and S&P Global Ratings, have made no changes to their respective credit ratings for China.
Fitch affirmed China’s A+ rating with a stable outlook in August, and S&P Global stated on Wednesday that it has retained China’s A+ rating with a ‘stable’ outlook. Responding to queries from Reuters, S&P clarified, “We last affirmed our A+ long-term ratings on China in June with a stable outlook, and there have been no changes to that yet.”