Moody's Downgrades China's Credit Outlook Due to Debt Concerns

Moody's Investors Service has downgraded China's credit rating outlook from "stable" to "negative," citing growing debt concerns in the world’s second-largest economy. 

The downgrade reflects increasing signs that the government and public sector will likely provide financial support to regional authorities and financially struggling public companies.

In a statement, Moody's noted that this shift raises significant risks to China's financial and economic stability, pointing to a weaker economic growth and challenges in the real estate sector the Asian giant is facing.

The Chinese Ministry of Finance expressed its disappointment with the decision, affirming China's capability to counter risks and challenges. 

The ministry criticized the agency's "unfounded concerns" about China's financial health.

Real estate, a crucial pillar of growth in China, has long constituted a significant portion of the country's GDP along with the construction sector. 

It also serves as a major revenue source for local associations, which are facing severe financial issues after three years of substantial spending to combat the COVID-19 pandemic.

In an effort to revitalize the struggling real estate sector, authorities have doubled support measures in recent months, but results remain modest.

Concerns Over Liquidation

The financial difficulties faced by major real estate groups like Evergrande and Country Garden continue to heighten skepticism among Chinese consumers, who are reluctant to purchase homes amidst unfinished buildings and falling square meter prices.

The real estate crisis poses a major obstacle to economic recovery. 

China has set a target of achieving "around 5%" growth this year, a goal that some economists believe is difficult to attain without a massive stimulus plan. 

The government, however, seems inclined toward targeted measures.

China's GDP grew by 3% last year, significantly lower than the 5.5% target, marking one of the weakest paces in four decades.

Since the liberalization of the real estate market in 1998, the sector has seen significant growth. 

However, in recent years, Beijing has recognized the high level of debt in the sector as a considerable risk to the economy and financial system.

Since 2020, Beijing has gradually tightened credit conditions for these groups, limiting funding sources for already heavily indebted companies.

This policy shift accelerated the collapse of one of the sector's largest companies, Evergrande, which has been given until January to present a restructuring plan to avoid liquidation.