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Moody's issues downgrade warning for China's credit rating amid economic challenges

Published 06/12/2023, 01:14 pm
Updated 06/12/2023, 01:30 pm
© Reuters.  Moody's issues downgrade warning for China's credit rating amid economic challenges

Ratings agency Moody's has issued a downgrade warning on China's credit rating, highlighting concerns over the costs associated with supporting local governments and state firms, as well as managing the ongoing property crisis. This move has shifted the outlook on China's A1 debt rating from "stable" to "negative," a change that mirrors a similar recent adjustment to the United States' credit rating.

The warning indicates potential broader economic risks for China, including the need for increased support for debt-laden local governments and state firms. Moody's cites these factors as risks to China's fiscal, economic, and institutional strength. Additionally, concerns regarding lower medium-term economic growth and the downsizing of the property sector have been raised.

In response, China's Finance Ministry expressed disappointment, asserting that the economy is poised for recovery and that the property crisis and local government debt issues are under control. However, the market reaction was less optimistic, with blue-chip stocks falling nearly 2% and the cost of insuring China's sovereign debt rising.

Despite affirming the A1 rating, Moody's predicts a slowdown in China's economic growth to 4.0% in 2024 and 2025, with an average of 3.8% from 2026 to 2030. This outlook contrasts with the views of S&P Global and Fitch, which maintain stable outlooks for China at an equivalent A+ rating.

Broader economic challenges

The International Monetary Fund (IMF) reports that local government debt in China reached 92 trillion yuan (US$12.6 trillion) in 2022, accounting for 76% of the country's economic output, up from 62.2% in 2019. This increase, along with significant capital outflows, underscores the mounting economic pressures facing China.

The situation reflects broader economic challenges for China, including the struggle to recover post-pandemic, a deepening housing crisis, local government debt concerns, slowing global growth, and geopolitical tensions. Analysts suggest that China's economic model may need to shift from debt-fuelled investment to one driven more by consumer demand. In light of these challenges, China's central bank has pledged accommodative monetary policy and structural reforms.

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