Moody's downgrades outlook on China credit rating over debt fears

Moody's downgrades China credit rating outlook on debt fears

Ratings agency Moody's on December 5 downgraded the outlook on China's credit rating to "negative" from "stable" on the back of rising debt in the world's second-largest economy, with Beijing saying it was "disappointed" by the move.

The affirmation of the A1 rating reflects China’s financial and institutional resources to manage the transition orderly. Its economy’s vast size and robust, albeit slowing, potential growth rate, support its high shock absorption capacity, the ratings agency said in a note.

The change "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", the US agency said in a note.

This, it said, was "posing broad downside risks to China's fiscal, economic and institutional strength".

The move "reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector", it added.

China's vast property sector, which accounts for about a quarter of gross domestic product, is mired in a deep debt crisis, with some of the nation's biggest developers owing hundreds of billions of dollars and facing going out of business.

In light of China's government's consistently stated policy objective, over the medium term, Moody's expects its property sector to remain smaller in proportion to the entire economy than it was before the property correction that started in 2021.

Beijing's finance ministry said in response it was "disappointed with Moody's decision".

"Since the beginning of this year, facing a complex and severe international situation and against the backdrop of unstable global economic recovery and weakening momentum, China's macro economy has continued to recover," a spokesperson said.

Moody's expects that China's annual GDP growth will be 4 percent in 2024 and 2025, and an of average 3.8 percent from 2026 to 2030, with structural factors, including weaker demographics driving a decline in potential growth to around 3.5 percent by 2030. To offset the diminished role of the property sector over the medium term, substantial and coordinated reforms
will be needed for consumption and higher value-added production to drive growth, the agency said.

China's recovery has been hampered by weak consumer and business confidence, the persistent housing crisis, record youth unemployment and a global slowdown which is weighing on demand for Chinese goods.

After a tough year for the world's number-two economy, there have been flickers of life in recent weeks, with third-quarter growth coming in more than expected at 4.9 percent.

Despite the execution risks associated with the complexity of reforms, Moody's expects gradual reforms to continue to enhance innovation and technological development, educational quality, further rebalancing of growth towards high value manufacturing and services sectors and the productivity of SOEs, which will support productivity and GDP
growth and allow living standards to continue to rise.

And while growth will be lower than previously expected, it will remain robust compared with other A-rated peers. The scale of China's economy and growth in per capita GDP, which will occur in a context of ongoing structural change towards higher value sectors will continue to support Moody's assessment of China's economic strength.

China's other key strengths include low external risks and financing costs as large domestic savings foster high debt affordability. Large fiscal and foreign exchange reserves, and the government's control of parts of the economy and financial system, lend effectiveness to measures aimed at stemming financial, and ultimately social stability risks, the ratings agency said.