China,naturally,expressed disappointment with Moody’s action,saying its concerns were unnecessary and that,despite a “complex and harsh” international environment,the economy had continued to recover and was advancing steadily.

Chinais on track to achieve its official target of GDP growth of around 5 per cent this year,albeit from a base depressed by last year’s “zero COVID” response to the pandemic,with its widespread,severe and protracted lockdowns.

It has also left in place its objective of doubling the size of the economy,relative to 2020,by 2035. That would require annual growth rates of around,or perhaps slightly above,five per cent for each of the next 12 years.

Moody’s,however,referred to the increased risks of structurally and persistently lower medium-term economic growth and the continued downsizing of the property sector as factors in its downgrading decision.

Home sales continue to fall,activity within a manufacturing sector suffering from over-capacity continues to shrink (despite efforts to stimulate manufacturing),youth unemployment is at levels so disconcerting that the authorities have stopped publishing the unemployment rate and the hoped for shift in the economy towards increased consumption is yet to develop any momentum.

Moody’s queried the effectiveness of some of Beijing’s policy responses to the challenges.

So far,the authorities have moved cautiously,anxious to avoid the unintended adverse consequences that might occur from a large-scale and broad stimulus program.

They are helping,directly and via the state-owned banks,local governments refinance their debts,extend the terms of loans,lower their interest costs and bring their off-balance-sheet liabilities onto their own balance sheets to create greater transparency and discipline.

Beijing is also thought to have drawn up a list of about 50 major developers that will receive unsecured finance – an injection of short-term liquidity – from state-owned banks in an attempt to keep the better-managed developers afloat and enable them to complete their projects and help stabilise the sector,albeit at much-diminished levels.

It has also earmarked spending on urban redevelopment – the renovation of “urban villages” in its big cities – as a mechanism for ensuring property-related activity that will generate some level of support for the stronger developers.

Fortuitously,China’s banks haven’t had significant exposures to the big developers,which have relied on pre-sales and the issuance of bonds to foreign investors for most of their funding. Foreign investors have seen the value of their bonds decimated.

Moody’s downgrading isn’t as much an alarm bell as it is a warning signal.

China’s economy faces some complex structural challenges,both internal and,given the increased tensions between China and the West,external.

There is a sense that the messy,inter-connected,finances of the property,regional and local governments and trust sector are rapidly reaching the point where they could threaten the country’s financial stability and cause contagion and problems for the banking sector.

The authorities,however,are very aware of them and have the benefit of low central government debt,the fact that the economy is still growing at a respectable rate and the authoritarian nature of the state to respond to them.

Nevertheless,there is a sense that the messy,interconnected,finances of the property,regional and local governments and trust sector are rapidly reaching the point where they could threaten the country’s financial stability and cause contagion and problems for the banking sector.

So far,Beijing’s responses have been piecemeal and incremental,more band-aids than solutions,although bringing the hidden debts of local governments into the open is a necessary prerequisite for any structural reforms even if that forces local government spending to shrink and weighs on economic activity.

Similarly,while its response was crude and ultimately destructive,it did need to do something about the speculation-driven property bubble,although it really needed it to deflate slowly rather than burst. Now it needs to contain the damage while salvaging something more sustainable from the wreckage.

China’s policymakers will meet before the end of the year at their annual Central Economic Work Conference,at which the national economic and financial agenda for next year (an agenda developed by the Politburo) will be discussed and set.

The outcome of that conference could provide an insight into how decisively the authorities will respond to the challenge of a now-discredited economic model that isn’t evolving as quickly as the authorities want and need it to,while trying to cope with the destabilising legacies of China’s past economic and financial strategies.

The Business Briefing newsletter delivers major stories,exclusive coverage and expert opinion.Sign up to get it every weekday morning.