(Bloomberg) -- China sought to nip any hit to investor sentiment in the bud after a bearish credit outlook on debt threatened to exacerbate concerns over the financial health of the world’s second-largest economy.

One day after Moody’s Investors Service cut its outlook for Chinese sovereign bonds to negative, the central bank dialed up its support for the yuan a notch and state media published a handful of articles citing experts who denounced Moody’s understanding of China’s economy. The finance ministry had earlier insisted the nation’s growth will be resilient.

The multi-pronged defense of China’s debt status and financial system underscored how critical it is for Beijing to reassure investors and convince them the nation’s bond and asset markets are worth returning to. Foreigners remain extremely pessimistic about the ability for policymakers to turn around a years-long property slump and prevent the economy from stagnating, making the Moody’s cut yet another thorn in the government’s side. 

“If they have been quite ambivalent to the actions by Moody’s yesterday, I think investors might start questioning if fiscal sustainability is top of mind for authorities,” said Louise Loo, lead economist at Oxford Economics Ltd. She said the fact that China was “quite indignant” about the cut “suggests to us that issues that were raised by Moody’s were quite top of mind for policymakers.”

“I think investors want to see that,” Loo added. 

China’s stocks and the yuan have both underperformed against peers in the region as the economy’s performance has disappointed. Confidence among businesses and households remains weak and various efforts to bolster the property sector haven’t really taken root. Foreign investment has plummeted.

A widening yield differential with the US as the People’s Bank of China cut policy rates and the Federal Reserve raised them has also weighed on sentiment: Foreign investors have been selling yuan-denominated bonds at a record pace to buy notes with higher yields elsewhere. 

The Moody’s announcement, meanwhile, put a spotlight on China’s debt issues. While the agency retained a long-term rating of A1 on the nation’s sovereign bonds, it cited the usage of fiscal stimulus to support debt-laden local governments and the spiraling property downturn as risks. 

The pushback from China generally followed a theme: Moody’s just doesn’t know this economy.

“The rating agency’s understanding of how the Chinese economy works and how the Chinese government functions is not deep enough and does not reflect the reality,” Feng Qiaobin, a deputy director of macroeconomic research at a department under the State Council, was quoted as saying in one state-backed newspaper. She told the publication that the cut was based on outdated information.

State broadcaster China Central Television echoed that criticism in a report published on Wednesday, saying the change was based on “misjudgments” over the nation’s growth potential and government debt issues. Citing experts, the report said Moody’s and other global ratings agencies have historically been overly harsh toward emerging markets. 

Wednesday’s state media reports came a day after an initial statement from the Ministry of Finance, which shortly after Tuesday’s cut defended the economy as one that is “highly resilient and has large potential.” The property downturn is well under control, the agency added. 

A major Chinese ratings agency China Chengxin International Credit Rating Co. also sought to allay concerns about the creditworthiness of the country’s sovereign debt. On Tuesday, it reiterated its outlook for the notes as stable and said Beijing “still has ample room to control the rise in debt risks.”

Concerns over China’s debt probably aren’t going away. After a rare mid-year move to raise the 2023 fiscal deficit by issuing more sovereign debt, many analysts now see China becoming more forceful with fiscal support next year. Several economists project a headline deficit at 3.5% of gross domestic product or higher in 2024, well above the long-adhered to 3%. 

“China’s prospective provision of fiscal support to weaker regions may weigh on the sovereign’s balance sheet,” said Phoenix Kalen, head of emerging markets research at Societe Generale SA. 

Still, she offered a silver lining: “This may indicate a willingness by policymakers to place greater emphasis on bolstering economic growth by backstopping the more fiscally vulnerable parts of the country.”

Moody’s followed up its changed outlook for the sovereign rating with a similar move for some of China’s corporate borrowers on Wednesday. It downgraded its outlook on Hong Kong and Macau to negative from stable, and placed 26 Chinese local government financing vehicles on review for downgrade on the same day. 

Chinese markets on Wednesday found some support. The CSI 300 Index halted a three-day decline, while five-year credit default swaps on Chinese sovereigns remained far off a peak seen a year ago. That gauge measures the cost of hedging against the possibility of a default of the nation’s government bonds, and had briefly jumped in the previous session when the Moody’s cut was announced.

The yuan, meanwhile, was little changed in both onshore and overseas markets after the PBOC set a stronger-than-expected fixing of 7.1140 per US dollar — a move seen as one intended to keep the currency stable. 

There’s no indication that other ratings agencies may follow Moody’s lead. 

Fitch Ratings pointed Bloomberg News toward its most recent China commentary issues in August, when the agency affirmed its credit rating of A+ with a stable outlook. 

S&P Global Ratings said it could not comment about other company’s decisions or speculate on its future actions. The firm has rated China as A+ with a stable outlook since 2017, when it issued a downgrade following a similar action by Moody’s. 

--With assistance from April Ma, Philip Glamann, Niluksi Koswanage, Matthew Burgess and Evelyn Yu.

(Updates with Moody’s cut to Hong Kong and Macau outlook in 17th paragraph.)

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