Moody’s cuts China credit outlook to negative, citing lower growth and real estate risks

Dec 5 (Portal) – Ratings agency Moody’s cut its outlook for the Chinese government’s credit rating to negative from stable on Tuesday, citing lower medium-term economic growth and risks from a major correction in the country’s huge real estate sector.

The downgrade reflects increasing signs that authorities will need to provide financial support to indebted local governments and state-owned enterprises, posing major risks to China’s fiscal, economic and institutional strength, Moody’s said in a statement.

“The change in outlook also reflects the increased risks associated with structurally and persistently lower medium-term economic growth and the continued downsizing of the real estate sector,” Moody’s said.

Moody’s move was the first change to its China assessment since downgrading its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt.

While Moody’s on Tuesday affirmed China’s A1 long-term rating for local and foreign currency issuers, it said the country’s annual GDP growth will fall to 4.0% in 2024 and 2025 and average 3.8 from 2026 to 2030 % will be.

Most analysts expect the economy to be on track to meet the government’s annual growth target of about 5% this year, but activity has been very uneven.

The world’s second-largest economy has struggled to mount a strong recovery following the COVID crisis, as a deepening housing market crisis, local government debt risks, slow global growth and geopolitical tensions have dampened momentum. A number of policy support measures have proven only moderately beneficial, increasing pressure on authorities to take further stimulus measures.

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

After years of overinvestment in infrastructure, declining returns from land sales and rising costs to combat COVID-19, economists are finding that indebted municipalities now pose a major risk to the economy.

China’s Finance Ministry expressed disappointment at Moody’s downgrade, adding that the economy will continue its recovery as a positive trend. It also said real estate and municipal risks were manageable.

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

In October, China unveiled a plan to issue 1 trillion yuan ($139.84 billion) of government bonds by year-end to boost economic activity and raised its 2023 budget deficit target to 3.8% of gross domestic product (GDP). . originally 3%.

The central bank has also made small interest rate cuts and pumped more money into the economy in recent months, pledging to maintain policy support.

Reporting by Gnaneshwar Rajan in Bengaluru and Kevin Yao in Beijing; Editing by Tom Hogue and Kim Coghill

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