Moody's Alters China's Debt Outlook to 'Negative'

By IndraStra Global News Team

Cover Image Attribute: The file photo of the Beijing Stock Exchange, Dated: 16 November 2021 /Source: N509FZ, Wikimedia Commons

 Concerns have amplified regarding China's mounting debt levels, prompting a major ratings firm to announce a shift in its outlook for China's sovereign debt to negative. Moody's Investors Service cautioned about the high debt levels among regional and local governments, many of which are struggling to meet their payments, foreseeing an inevitable intervention from the Chinese government to provide financial aid.
The Chinese economy's recent stumble and lower-than-anticipated growth rates have further exacerbated worries. Moody's highlighted the additional strain this situation could exert on the government's fiscal capabilities. The agency stated in a press release, "The change to a negative outlook 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, posing broad downside risks to China's fiscal, economic, and institutional strength."
Maintaining its current A1 rating, Moody's affirmed China's position, though it remains several notches below the highest rating of Aaa, classified within the investment-grade debt bracket. The Chinese Finance Ministry expressed disappointment, dismissing Moody's concerns regarding China's economic growth prospects and fiscal sustainability as unnecessary.
Standard & Poor's and Fitch, the other major ratings agencies, currently uphold China's debt within the middle tier of investment grade, maintaining a stable outlook.
The challenge of indebtedness among provincial and local governments in China has persisted for years. Tasked with propelling the country's economic growth, these entities invested in infrastructure projects, often financing them through debt. However, misallocated investments and economic downturns have hindered their ability to service these debts, particularly as China's real estate sector faces a prolonged downturn.
Pan Gongsheng, governor of the People's Bank of China (PBoC), acknowledged the central bank's readiness to offer liquidity support to regions burdened with heavy debt. Yet, this acknowledgment underscores the disparity between China's fiscal strengths, characterized by the central government's low debt-to-GDP ratio, and the substantial debt burdens borne by provincial and local authorities.
Economist Brad W. Setser highlighted China's combination of fiscal strengths and weaknesses, noting the disparity between the central government's low debt-to-GDP ratio and the substantial debt burdens of provincial and local authorities.
Tianlei Huang from the Peterson Institute for International Economics noted Beijing's ongoing efforts to assist local governments, emphasizing the increasing intergovernmental transfers and recent announcements of additional treasury bonds directed to local governments. However, experts caution that these efforts may provide short-term relief, but the overarching challenge remains unresolved.
Experts also suggest that Moody's altered outlook might have a limited immediate impact, even if followed by a future downgrade. The regulated nature of China's financial and global markets by the government mitigates some of the typical implications of credit downgrades. However, concerns remain about the long-term resolution of the issue, with doubts about the government's willingness to take substantial steps.
Looking ahead, experts anticipate smaller measures from Beijing, such as achievable growth targets, fiscal stimulus, and support for local governments and struggling enterprises, rather than sweeping changes. The larger structural problem of replacing infrastructure and real estate-driven growth with a new model remains a challenge yet to be addressed comprehensively.
While China sets national objectives like common prosperity and technological self-sufficiency, aligning them effectively with economic growth remains elusive. The quest for an alternative growth model, potentially market-oriented, presents a stark challenge to the current strategies under President Xi Jinping's leadership.

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