Moody’s Investors Service is busily and provocatively poking not just one bear — but the two biggest creatures in the global economic kingdom.

Last month, the agency’s analysts threatened to yank away Washington’s last remaining AAA credit rating. That broadside exacerbated the rise in US 10-year bond yields to 17-year highs.

This week, it was Beijing’s turn to hear Moody’s growl. On Tuesday (December 5), Moody’s cut its outlook on the Chinese government’s debt to “negative” from “stable” as Asia’s biggest economy grapples with an economic slowdown and deepening property crisis.

A day later, Moody’s went further by telegraphing possible rating actions against state-owned banking giants, dozens of Chinese government-backed entities funding infrastructure projects and even Hong Kong and Macau.

If Moody’s is trying to get Chinese leader Xi Jinping’s attention, threatening downgrades for the Industrial and Commercial Bank of China Ltd, China Development Bank and other behemoths will surely do the trick. It will do the same for global investors worried Beijing isn’t acting fast enough to contain contagion risks.

Generally, the impulse is to lash out at such warnings. US President Joe Biden’s team did just that.

In response to Moody’s downgrade threat, Treasury Secretary Janet Yellen said: “This is a decision I disagree with. The American economy is fundamentally strong, and Treasury securities remain the world’s preeminent safe and liquid asset.”

China is pushing back, too. On Tuesday, Xi’s Ministry of Finance said it was “disappointed” and that “concerns of Moody’s about the prospects of China’s economic growth and fiscal sustainability are unwarranted.”

Beijing added that the fallout from property and fiscal troubles are “controllable” and that it’s working to “deepen reforms to address risks and challenges.” Yet it’s worth considering the good that could come from rating powers like Moody’s issuing a well-timed plea for firmer action in the two economic superpowers.

In America’s case, Moody’s served up a useful reminder to Biden, Yellen and Federal Reserve Chairman Jerome Powell that the laws of economic gravity still matter.

With the US national debt topping US$33 trillion, Biden’s White House upping spending and the Fed tightening the most aggressively in decades, faith in the dollar is fading fast.

The rallies in gold and cryptocurrencies are but the latest reminder that conventional Bretton-Woods-era financial realities are colliding with modern-day neglect of the ways in which markets can turn on even the biggest economies.

China, too. Soon, the Communist Party’s 24-member Politburo will, in theory, convene to mull policy priorities and settle on growth targets for the year ahead. After that, the annual Central Economic Work Conference will bring together central government and municipal leaders to chart a course.

Economists at JPMorgan, Standard Chartered and other top investment banks figure a growth target in the neighborhood of 5% is in the cards for 2024.

Goldman Sachs economist Maggie Wei speaks for many when she says “an ambitious growth target could help mitigate the risk of China falling into a self-fulfilling cycle of downbeat expectations, further depressing growth and reinforcing pessimistic expectations.”

Yet economic gravity is more complicated than that, as Moody’s is reminding party leaders.

On China, Moody’s says its reasoning “reflects rising evidence that financial support will be provided by the government and wider public sector to financially stressed regional and local governments and state-owned enterprises.”

Moody’s also speaks for many when it warns of “increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector.”

But written between the lines in bold font is that many global investors aren’t buying Xi’s pledges to implement bold structural reforms. And how recent moves to ramp up stimulus, as Moody’s warns, are now “posing broad downside risks to China’s fiscal, economic and institutional strength.”

In its retort, China’s finance minister claimed mainland growth is recovering in the October-December quarter and that the Chinese economy will generate more than 30% of global GDP in 2023. That would be in line with International Monetary Fund (IMF) forecasts.

Yet absent from China’s recent rhetoric is a timeline for taking steps to grow better, not just faster. In the short run, additional stimulus may be appropriate, notes economist Ting Lu at Nomura Holdings. “Despite the multitude of stimulus measures announced recently,” he says, “we believe it is still too early to call the bottom.”

The good news is that Xi is believed to have empowered Premier Li Qiang to accelerate moves to revitalize the private sector. Last month, Li’s team unveiled a 25-point policy package to increase funding to private businesses and level playing fields.

The plan involves eight financial regulators and business chambers, including the People’s Bank of China, the National Administration of Financial Regulation, the China Securities Regulatory Commission, the National Development and Reform Commission, the State Administration of Foreign Exchange, the Ministry of Industry and Information Technology, the Ministry of Finance and the All-China Federation of Industry and Commerce.

The objective: greatly increase the ratio of loans for private enterprises to boost innovation and productivity and support more dynamic supply chains. The plan, Li’s team says, is to ensure “continuous funding services” for private enterprises that avoid “blindly stopping, suppressing, withdrawing or cutting off loans.”

China “is confident and more capable of achieving long-term stable development, and continuously bringing new impetus and opportunities to the world through China’s accelerated development,” the NDRC said in a statement this week.

Economist Diana Choyleva at Enodo Economics says it’s clear that “Beijing is serious about getting credit flowing to the healthier parts of the property sector, being private or state-owned. They are not content with leaving the decision in the hands of the banks, which for a variety of reasons have discriminated against the private sector.”

A vital part of the enterprise is jumpstarting the development of a high-yield bond market to broaden China’s capital markets universe. Creating a vibrant and diverse range of debt offerings would, in theory, increase private sector financing options and increase China’s appeal as an investment destination.

Here, Xi’s efforts to increase the use of the yuan in global markets is a plus. The campaign is gaining traction just as doubts about the US dollar increase. Nothing would accelerate that growth faster than implementing big reforms expeditiously and transparently.

It’s here where Xi and his team need to regain the trust of global investors. The Moody’s news, it’s worth noting, didn’t savage Chinese assets.

As economists at advisory firm China Beige Book observed: “The most important takeaway from the Moody’s announcement is that it takes their team years longer to come to an obvious conclusion than it does most other China watchers. Nothing new here. Carry on.”

Analysts at Citigroup Global Markets, meanwhile, think China’s investment-grade credit issues will be more attractive than US peers in 2024. “The market has already priced this in to a degree and China investment-grade has some value,” Citi analysts wrote following the Moody’s news.

Citi analysts also cited China’s “stronger, yet still fragile macro story” as Beijing acts to stabilize property markets. Investment-grade Chinese dollar bonds are up about 5.4% so far in 2023.

“China risks are mainly in the price,” Citi analysts argued. “In times of onshore equity-market volatility, the Chinese offshore credit market tends to do well as it is seen as an asset and currency diversifier for local investors.”

Where Moody’s has a point, though, is analysts’ worry that the period of China lifting GDP rates via stimulus and investment alone is over.

For one thing, says analyst Samuel Kwok at Fitch Ratings, “remaining policy headroom may be limited, as we believe central government needs to balance moral hazard issues when supporting local governments with high debt burdens.”

For another: only bold economic retooling that unshackles China’s longer-term growth potential can increase the quality of mainland growth. This stimulus-over-reform tendency explains why S&P Global Ratings sees China growing under 5% into 2026.

“Despite stimulus, China’s property sector remains stressed,” says S&P credit analyst Eunice Tan. “Constrained access to credit support and high corporate debt leverage are denting liquidity profiles, particularly of property developers and heavily indebted local government financing vehicles.”

As a result, S&P’s Tan says the Asia-Pacific’s growth engine is in the process of shifting from China to South and Southeast Asia. “This shift could constrain the medium-term upside for China’s issuers while improving those of issuers in India, Vietnam, the Philippines and Indonesia,” Tan notes.

Though data released on Thursday showed a 0.5% increase in China’s exports in November year on year, imports dropped 0.6%. “The data further dimmed hopes on a consumption-led recovery in China and more policy supports are needed to stimulate demand,” UBS analysts wrote in a note.

Analyst Kelvin Wong at OANDA adds that “domestic demand has remained lackluster in China despite ongoing revival efforts by policymakers via targeted monetary and fiscal stimulus measures.”

Hence, Wong notes, “It seems that the prior one-month recovery of import growth recorded in October is likely a ‘blip’ and November’s negative year-on-year growth rate suggests the rolling twelve months of negative growth trend in imports remains intact.”

As challenges mount, global investors are waiting with bated breath for the Politburo’s third plenum event to convene. Typically, this once-every-five-years session happens in early December.

That it hasn’t been scheduled yet has fueled speculation that first Xi wants to get a handle on dueling challenges — from deflationary pressures to real estate to record youth unemployment to elevated local government debt.

The US also faces daunting challenges as a wildly polarizing 2024 presidential election approaches. Not least of which is surging debt that’s raised the US government’s estimated annualized debt interest payments to the $1 trillion mark.

Investors are free to ignore what Moody’s, S&P and Fitch say about fiscal trajectories in Washington and Beijing. But as credit outlooks darken, there’s merit to recalling that as Biden and Xi insist they’re on top of their respective debt concerns, many observers, analysts and investors aren’t buying the party line.

Follow William Pesek on X, formerly Twitter, at @WilliamPesek