Moody’s cuts China credit outlook to negative

A Chinese national flag flutters at the headquarters of a commercial bank on a financial street near the headquarters of the People’s Bank of China, China’s central bank, in central Beijing Nov. 24, 2014. REUTERS/Kim Kyung-Hoon/File photo

Ratings agency Moody’s on Tuesday cut its outlook on China’s government credit ratings to negative from stable, citing lower medium-term economic growth and risks from a major correction in the country’s vast property sector.

The downgrade reflects growing evidence that authorities will have to provide financial support for debt-laden local governments and state firms, posing broad risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.

“The outlook change also reflects the increased risks related to structurally and persistently lower medium-term economic growth and the ongoing downsizing of the property sector,” Moody’s said.

The move by Moody’s was its first change on its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt.

While Moody’s affirmed China’s A1 long-term local and foreign-currency issuer ratings on Tuesday, it said it expects the country’s annual GDP growth to slow to 4 percent in 2024 and 2025, and to average 3.8 percent from 2026 to 2030.

Most analysts believe the economy is on track to hit the government’s annual growth target of around 5 percent this year, but activity is highly uneven.

The world’s second-biggest economy has struggled to mount a strong post-COVID recovery as a deepening crisis in the housing market, local government debt risks, slow global growth and geopolitical tensions have dented momentum. A flurry of policy support measures have proven only modestly beneficial, raising pressure on authorities to roll out more stimulus.

READ: China’s property slump worsens, clouding recovery prospects

Local government debt reached 92 trillion yuan ($12.6 trillion), or 76 percent of China’s economic output in 2022, up from 62.2 percent in 2019, according to the latest data from the International Monetary Fund (IMF).

After years of over-investment in infrastructure, plummeting returns from land sales, and soaring costs to battle COVID-19, economists say debt-laden municipalities now represent a major risk to the economy.

China’s Finance Ministry said it was disappointed by Moody’s downgrade, adding that the economy will maintain its rebound an positive trend. It also said property and local government risks are controllable.

“Moody’s concerns about China’s economic growth prospects, fiscal sustainability and other aspects are unnecessary,” the ministry said.

READ: China to accelerate issuance of gov’t bonds, says finance minister

In October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) in sovereign bonds by the end of the year to help kick-start activity, raising the 2023 budget deficit target to 3.8% of gross domestic product (GDP) from the original 3 percent.

The central bank has also implemented modest interest rate cuts and pumped more cash into the economy in recent months, pledging to sustain policy support.