Moody's Downgrades China's Credit Outlook to Negative

Moody's lowered its outlook on Chinese sovereign bonds to negative, highlighting worsening global concerns about the level of debt in the world's second-largest economy.

The credit rating agency said in a statement that it lowered its outlook from stable to negative, while maintaining the country's sovereign bond rating at (A1). 

It added that China's use of fiscal stimulus to support local governments and state-owned enterprises represents downside risks to the country's economy.

The amendment comes at a time when the worsening real estate crisis in China has led to resorting to financial stimulus, while the country has increased its borrowing as a major indicator of the strength of its economy. This has raised concerns about the country's debt level, with Beijing set to sell a record amount of bonds this year.

The last time Moody's lowered China's credit rating was in 2017. That year, it lowered the rating from (Aa3) to (A1), due to the possibility of a significant rise in debt in all sectors of the economy, and the expected impact of this on the country's financial resources. This was the first time the agency downgraded Chinese bonds since 1989.

Data released last week showed both manufacturing and services activity contracted in November, supporting the belief that more government action is needed to support the faltering economic recovery.

Last October, President Xi Jinping indicated intolerance of the risks of deflation and a sharp decline in the growth rate, while the government raised the budget deficit to the largest percentage in three decades at 3.8% in 2023, so that the ratio of the fiscal deficit to GDP exceeds the 3% ceiling.

Adjusting the central government's budget deficit ratio allowed for the sale of additional sovereign bonds worth one trillion yuan during the current year, to support disaster relief efforts and the construction sector. Local governments also sold special refinancing bonds to replace some high-cost debt that was not included in the budget.

Earlier this year, Fitch Ratings Agency stated in an interview with Bloomberg TV that it might reconsider the rating of Chinese sovereign bonds at A+. The agency recently confirmed this rating with a stable outlook.

As for the credit rating agency, S&P Global Ratings, it has kept China's rating at (A+) with a stable outlook since the downgrade of the previous credit rating in 2017, which came after a similar action by Moody's.