Moody’s has downgraded China’s credit outlook from stable to outlook as of the 5th of December. This negative outlook comes as a sign that Moody’s could reduce China’s credit rating, which measures how reliable they are at repaying their loans. Credit ratings are typically used by investors to assess the risks of investing in bonds and inform lenders of where to set interest rates. Despite this, China’s debt is still of investment grade, with their National sovereign bonds remaining A1 rated. This comes as a result of their rating being downgraded from Aa3 in 2017 due to the likelihood of a rise in economy-wide debt. The UK and US credit ratings remain higher at Aa3 and Aaa respectively.
China remains the second largest economy with a GDP of 17.96 trillion as of 2022 according to the world bank. Although China is on track to achieve the predicted growth of 5.4 per cent its growth outlook for future years is weak, and expected to slow to 3.5 per cent by 2028 according to the International Monetary Fund (IMF). Blue chip shares have dropped by 12 per cent since January, and the downgraded credit outlook caused further reductions. China’s blue-chip index fell by 1.9 per cent on Tuesday the 5th of December, putting it at the lowest level since February 2019.
The downgrade has come as a result of China struggling to deal with multiple economic issues this year. Firstly, China has faced a slowdown in its broader economy through weaker demand in the manufacturing sector, which represents 28 per cent of its GDP. Furthermore, under headlines recently, Beijing is under pressure to tackle a slowdown in the country’s cash-strapped property sector. A slowdown in demand for housing caused by consumer confidence being knocked by a failure to complete developments on time has ultimately resulted in China’s biggest property companies plunging into crisis. Some of China’s largest construction companies, including Evergrande, are facing insolvency issues and have stopped building altogether leaving customers stranded. Local governments, which rely heavily on land sales to generate revenues, have also been ensnared in the turmoil.
The Chinese government has introduced many measures to stimulate economic growth however these have put pressure on public finances. Moody’s warned that Beijing would need to bail out local and regional governments and state-owned enterprises that were struggling with rising debts, hampering efforts to boost investment and growth. The IMF reported China’s debt as a percentage of GDP as 77.1 per cent for 2022, lower than that of the UK (101.36 per cent) and the US (121.38 per cent). Despite this, the credit outlook has been downgraded due to concerns about the potential cost of local government bailouts. Beijing is also on track for record bond issuance this year. Moody’s has stated that there is increasing evidence of the government providing financial support to weak regions which ultimately poses “broad downside risks to China’s fiscal, economic and institutional strength”.
China’s financial ministry has since reported on the downgrade, claiming it was “unnecessary for Moody’s to worry about China’s economic growth prospects and fiscal sustainability” and they are “disappointed with the decision”. Furthermore, they stated that the “macroeconomy continues to recover and high-quality development is steadily advancing”. They also added further comments stating the property sector slowdown on local and central government budgets was “controllable and structural”.