Moody’s, one of the world’s leading rating agencies, has lowered its outlook on China’s government credit ratings from stable to negative, reflecting the growing challenges that the country faces from a prolonged economic slowdown and a deepening crisis in the housing market.
The agency affirmed China’s A1 long-term local and foreign-currency issuer ratings, saying that the economy still has a high capacity to absorb shocks, but warned that the authorities will have to provide more financial support for the heavily indebted local governments and state-owned enterprises, which will erode China’s fiscal, economic and institutional strength.
Moody’s also said that it expects China’s annual GDP growth to decelerate to 4.0% in 2024 and 2025, and to average 3.8% from 2026 to 2030, as the country faces structural challenges such as an aging population, a shrinking labor force, and a declining return on investment.
The outlook downgrade comes as China is preparing for its annual Central Economic Work Conference, where the top leaders will set the policy agenda for the next year. Many analysts and government advisers have called for a more proactive fiscal and monetary policy to support the economy, which has been hit by the COVID-19 pandemic, the trade tensions with the US, and the geopolitical uncertainties.
But the most pressing issue for China is the turmoil in the property sector, which accounts for about a quarter of the GDP and has been a major driver of growth and debt accumulation in the past decades. The collapse of Evergrande, China’s largest developer, has triggered a wave of defaults and liquidity crunches among other developers, suppliers, and local governments, posing systemic risks to the financial stability and social stability of the country.
Moody’s said that it expects the property sector to shrink in size and contribution to GDP over the medium term, and that the spillover effects of the downturn will adversely affect other sectors and consumer confidence for the foreseeable future.
The agency also said that China’s progress in achieving its carbon neutrality goal by 2060 will depend on its ability to balance the trade-offs between environmental and economic objectives, and to cope with the potential geopolitical and regulatory hurdles that may arise from its use of artificial intelligence and other advanced technologies.
The downgrade by Moody’s was the first change in its China view since it cut its rating by one notch to A1 in 2017, also citing expectations of slowing growth and rising debt. The other two major rating agencies, Fitch and Standard & Poor’s, rate China A+, which is equivalent to Moody’s, and both have a stable outlook.
