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Moody’s shifted their outlook on China’s sovereign credit rating to “negative” on Tuesday morning, highlighting a potential need for stimulus to help bolster the Chinese economy against headwinds emanating from its beleaguered property sector. The persistent downturn in real estate investment has slashed industrial profits in 2023. 

A potential stimulus package would require the origination of new debt and an expansion of Beijing’s budget deficit. The last time Moody’s cut China’s credit rating was 2017, and the ratio of China’s government debt to GDP surged by more than a third between then and 2022. Foreign investment into China and global fund holdings of the country’s equities has slipped throughout the past several months, putting Beijing in an increasingly difficult economic situation.

Related ETFs: iShares MSCI China ETF (MCHI), VanEck China Bond ETF (CBON), Global X MSCI China Real Estate ETF (CHIR)

Following a similar move on US sovereign debt in November, ratings agency Moody’s shifted their outlook on China’s government credit ratings from “stable” to “negative” this morning. Though it maintained an A1 rating (comparable to A+ at peer rating agencies like S&P) on China’s long-term local and foreign-currency issuer and senior unsecured debt, Moody’s cited “rising evidence that financial support will be provided by the government and wider public sector to financially-stressed regional and local governments (RLGs) and State-Owned Enterprises (SOEs), posing broad downside risks to China’s fiscal, economic and institutional strength.”

Moody’s most recent change to China’s sovereign credit rating came in 2017, downgrading the country to its current A1 level from Aa3, and citing concerns that slowing economic growth would reduce the debt-servicing abilities among highly-leveraged institutions and expand Beijing’s budget deficits. That was Moody’s first downgrade for the country since 1989. The potential for a new round of widespread stimulus would obviously spur the issuance of even more debt in a bid to revive the economy – increasing the already extended government debt to GDP ratio. That gauge of the government’s debt load expanded to 77.1% in 2022, up from just…

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