Moody's downgrades China's credit outlook to negative on debt worries
Moody's Investors Service on Tuesday changed China's government credit ratings outlook from stable to negative. This decision comes as a result of concerns about China's lower medium-term economic growth and increasing debt. Moody's predicts that China's annual GDP growth will be around 4.0% in 2024 and 2025, and an average of 3.8% from 2026 to 2030. The negative outlook suggests that Chinese authorities may need to step in and provide financial support for debt-ridden local governments and state firms.
Reasons behind the downgrade
The downgrade is mainly due to worries about China's economy, which has been struggling to bounce back after the COVID-19 pandemic. "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. Factors such as a housing market crisis, local government debt risks, slow global growth, and geopolitical tensions have all contributed to the country's economic challenges.
Support measures have had a limited impact
Although the Chinese government has implemented policy support measures, their impact has been limited, leading to increased pressure for more stimulus. In fact, local government debt in China reached 92 trillion yuan (Rs. 1,085.5 lakh crore) or 76% of the country's economic output in 2022, up from 62.2% in 2019, according to the latest data from the International Monetary Fund (IMF).
Moody's growth concerns are unnecessary: China
China's Finance Ministry expressed disappointment over Moody's downgrade, stating that the economy will continue its rebound and maintain a positive trend. "Moody's concerns about China's economic growth prospects, fiscal sustainability, and other aspects are unnecessary," the ministry added. In an effort to boost activity, China announced in October to issue 1 trillion yuan (Rs. 11.77 lakh crore) in sovereign bonds by year-end. China also raised the 2023 budget deficit target to 3.8% of GDP from the original 3%.
Central bank's policy support measures
In response to these challenges, the People's Bank of China has made modest interest rate cuts and injected more cash into the economy in recent months, promising to maintain policy support. However, these measures have only provided modest benefits in addressing China's economic issues. As the country grapples with economic challenges, Moody's downgrade highlights the need for more effective policy actions to ensure stability and growth in the world's second-largest economy.
