China's Market In Turmoil As Moody's Warning Erases Reopening Gains

Moody’s Investors Service shifted its outlook on China’s government credit ratings from stable to negative on Tuesday, amplifying the already bearish momentum of Chinese stocks and assets, and highlighting rising concerns over the country’s fiscal and economic stability.

Moody’s justified its action by citing increasing evidence of the Chinese government’s financial support being redirected towards stressed regional and local governments (RLGs) and State-Owned Enterprises (SOEs). This reallocation of resources towards these troubled entities raises serious questions about the broader downside risks to China’s fiscal strength and economic integrity.

One of the most alarming revelations from Moody’s is the precarious state of SOE debt. Approximately one-third of the outstanding SOE debt, amounting to nearly 40% of China’s GDP, has an interest coverage ratio below 1. This indicates that the earnings of these companies are insufficient to cover interest expenses, pointing towards potential defaults unless state bailouts are provided.

Furthermore, the era of robust economic growth that China has experienced over the past decades seems to be fading. Moody’s projects a sobering outlook for China’s GDP growth, estimating it at 4.0% for 2024 and 2025, and averaging 3.8% from 2026 to 2030. By 2030, the potential growth is expected to decline to around 3.5%, influenced by structural factors like a weakening demographic profile.

Chinese Stocks Dip Further

The immediate market reaction to these developments has been stark. Large-cap Chinese equities, as tracked by the iShares China Large-Cap ETF FXI, have plunged over 10% in the last 10 trading sessions, marking the worst span in over a year.

This decline has nearly erased the gains from the “reopening trade” that followed initial speculations about the reopening of China’s economy post-pandemic lockdowns. Chinese stocks are now about 29% lower than the highs seen in late January 2023.

On Tuesday, the three largest holdings in the iShares China Large-Cap ETF – Tencent Holdings Ltd, Alibaba Group Holdings Ltd. BABA, and Meituan MPNGY – all traded negatively.

Among the thirteen largest Chinese large-cap companies traded on the U.S. market, 10 recorded negative daily changes in response to Moody’s news.

Yum China Holdings, Inc. YUMC experienced the steepest decline at 3.6%, while NIO Inc. NIO emerged as the top performer, rising by 5.2%.

The table below provides a snapshot of the performance of key Chinese large-cap stocks:

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