Moody’s, the global rating agency, has revised its outlook on China’s government credit ratings from stable to negative, citing increasing worries about the repercussions of surging local government debt and an escalating property crisis. This move underscores the growing evidence that Chinese authorities may need additional financial support for debt-laden local governments and state-owned enterprises, posing substantial risks to China’s fiscal, economic, and institutional strength.
The downgrade is linked to concerns about structurally and persistently lower medium-term economic growth and the ongoing contraction of the property sector. Moody mentioned the heightened risks associated with China’s need to navigate these challenges, reflecting a potential strain on its economic resilience. China’s major state-owned banks intensified U.S. dollar selling after Moody’s statement, resulting in the yuan remaining relatively unchanged by late afternoon. Since mid-November, the cost of insuring China’s sovereign debt against default reached its highest level.
While affirming China’s A1 long-term local and foreign-currency issuer ratings, Moody’s expressed expectations of a slowdown in China’s annual GDP growth to 4.0% in 2024 and 2025, with an average of 3.8% from 2026 to 2030. This outlook adjustment comes ahead of the Central Economic Work Conference, an annual event expected around mid-December. Analysts anticipate discussions on a steady growth target for 2024 and the potential for additional stimulus.
Despite the negative outlook, the A1 rating remains in the investment-grade territory, minimizing the likelihood of forced selling by global funds. Fitch and Standard & Poor’s, the other major rating agencies, currently rate China A+ with a stable outlook. China’s Finance Ministry expressed disappointment with Moody’s decision, asserting confidence in the country’s economic rebound and emphasizing that property and local government risks are manageable.
Amid the deepening property crisis, local government debt concerns, and global economic challenges, China’s growth trajectory has faced headwinds. Despite policy support measures, including interest rate cuts and increased liquidity injections, concerns persist, prompting calls for further structural reforms to diversify the economic model and reduce reliance on debt-driven investment.
The mounting local government debt, reaching 76% of China’s economic output in 2022, underscores the economic challenges. In response, China has introduced plans to issue sovereign bonds to stimulate economic activity and implemented a slightly increased budget deficit target for 2023. Foreign investors have exhibited caution towards China throughout the year, with capital outflows reaching $75 billion in September, the highest monthly figure since 2016.
