Moody’s is a credit rating agency which looks at companies, countries and territories, and takes a view on the state of their economy and finances and then assigns them a rating. This week, Moody’s lowered its rating of both the China mainland economy and the Hong Kong economy into negative territory and this was the cause of much consternation. According to the Financial Times, Moody’s staff were advised to avoid going to the office, and the Hong Kong government issued a statement saying that this was another example of western forces looking for opportunities to “smear” China and Hong Kong.
We are approaching the end of the year, and this is the time when many analysts, economists and organizations are taking a view on the year ahead. Surprisingly, quite a few of the investment banks, and other finance operations are taking a view which is neutral to cautiously positive in terms of 2024 compared to 2023. This year was supposed to have been the year of a major rebound from three years drenched in Covid troubles, but the rebound basically doesn’t seem to have happened, and the overall assessment of China in the business community, both in terms of published analysis and anecdotal opinions, is certainly not positive. And with investment banks, one always has to take their assessments with a grain of salt in that they inevitably want to see business growing, so that they can make more money.
The feeling on the ground is definitely gloomy in terms of next year, and there are lots of things happening which tend to suggest that there are significant problems lurking within the system and in the economy. This is a structure which is highly controlled and highly centralized, and that limits the extent to which events can trigger some kind of a reaction. But there is always the possibility of the unexpected. In fact, in a system with such a low degree of transparency, the unexpected is in fact to be expected.
And so our analysis is, for what it’s worth, that China is facing several years of difficulties. And the stresses within Chinese society, and between China and some parts of the rest of the world will continue to be present, and will probably be exacerbated. This is not an outlook that leads to optimism. And we wish that it was not so, because there are surely ways to make China into a system that is growing and positive. But to get there could require some fundamental changes, such as the shifting the balance of assets between households and the system which would impact on the interests of various groups. And there is also the fundamental ideological issue of what is the right direction to make sure China and its people are safe.
Generally, it’s true that investors, both foreign and Chinese, today seem reluctant to invest for all sorts of reasons, including the presence of geopolitical risk. One always hopes for the best, and over the past few decades, the Chinese economy has always found a way of overcoming issues, even if it means kicking the problem down the road and then finding a way to quietly resolve it. And that will be almost certainly part of the story over next year and the following years. The question is how big the strains and stresses are and the potential for something fundamental to occur if these stresses and strains are not reduced.
Anyway, that is just a thought prior to the weekend, which we hope will be a pleasant one for you.