The Great Wall of Woe: An overview of China’s struggling economy 

For the ratings agency Moody’s, the writing is on the wall. On December 5, 2023, credit ratings agency Moody’s Investors Service, Inc., slashed China’s credit outlook from stable to negative.

This decision was attributed to several factors, including rising evidence of financial support for regional and local governments (RLGs) and State-Owned Enterprises (SOEs), structurally lower medium-term economic growth, and the ongoing downsizing of the property sector. While Moody’s maintained the A1 rating for China’s sovereign bonds, the negative outlook indicates a potential risk of a downgrade in the future.

Notably, this marks the first time Moody’s has changed China’s outlook since 2017. Moody’s forecasts China’s annual GDP growth at 4.0% in 2024 and 2025, averaging 3.8% from 2026 to 2030, due to structural factors such as declining population. Downside risks to growth persist, with the ongoing downsizing of the property sector posing a major drag to China’s overall economic growth potential.

Is China becoming like Japan?

China, tripped by slow growth, surging unemployment, weak consumer sentiment, deflation, and banking and property sector troubles, faces a precarious future. Beijing, historically reluctant to use stimulus, is scrambling to give fiscal support, slashing taxes and injecting cash, which analysts believe will not be enough.

China’s descent into deflation revives anxieties about a Japan-like economic stagnation, especially with Japan being the world’s erstwhile second-largest economy and export powerhouse.

Mirroring Japan’s challenges with overcapacity and an aging population, China faces a delicate balancing act. While its economic model may offer a different path, navigating this deflationary tide will require decisive policy responses.

Wait or seek alternatives?

Moody’s outlook downgrade raises concerns about higher borrowing costs, capital flight, and dampened investment. Despite the headwinds, China remains to be a good prospect in the long run, and investors may opt to wait for a recovery, albeit market uncertainties could affect its pace.

Again, it is always wise to seek the perspective and the advice of your investment advisor. There are always alternatives. You will never run out of them. Some funds may offer a better strategic fit for your portfolio for now.

The writing on the wall may or may not be fuzzy, but it is best to prepare for a more strategically resilient portfolio as we welcome 2024.

(If you are a Metrobank client, please reach out to your relationship manager or investment specialist for advice. If not, you may sign up with us here.)

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ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to internal and external clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She has a Master of Business Administration (Finance) degree, with distinction, from the University of London, and a Bachelor of Science in Business Administration degree, cum laude, from the University of the Philippines. She also passed the CFA Level I exam and is a Licensed Fixed Income Market Salesman (FIMS), a Certified UITF Sales Person (CUSP) and a Certified Securities Specialist (CSS). She is a naturally curious person and likes to travel here and abroad.

DOMINIQUE “NICA” RAVELAS is a Research Officer at Metrobank’s Trust Banking Group, specializing in macroeconomic research. Formerly a sales trader under Luzon International Sales Desk. She holds a bachelor’s degree in business administration majoring in Financial Management from Far Eastern University-Makati where she was awarded as one of the Top Outstanding Senior Students (TOSS). In addition, she was an active student leader and represented FEU in various competitions where she was among the Top 15 Outstanding Finance Students in the Philippines (2017) and won 1st runner-up (NCR Ranking) in the 2016 National Finance Competition. Beyond her academic and professional pursuits, Nica enjoys shopping, travelling, and watching sunsets by the beach.