Moody’s Investors Service has downgraded China’s credit outlook to negative, citing concerns about the country’s escalating debt levels. The move is driven by worries about China’s extensive use of fiscal stimulus to support local governments and state-owned enterprises, posing potential risks to the economy. This follows a previous downgrade of the property sector’s outlook in September 2023.
The downgrade reflects Moody’s anticipation of a 5% decline in contracted property sales over the next six to 12 months, despite government efforts to boost the market. Government measures to encourage property purchases are expected to have a limited and uneven impact. The recent wave of debt defaults by major developers, including China Evergrande Group, has further contributed to the economic challenges.
China’s increasing debt has been fueled by heightened fiscal stimulus to stimulate growth, particularly in supporting local governments and state-owned firms. The negative outlook indicates a risk to China’s creditworthiness due to the mounting debt. While Moody’s maintains a long-term A1 rating on China’s sovereign bonds, the negative outlook suggests an increased likelihood of a future downgrade, underscoring the difficulties China faces in managing its debt and its potential impact on the economy.
In response to the downgrade, the China Ministry of Commerce expressed disappointment, emphasizing a difference in opinion with Moody’s assessment. Moody’s decision underscores global apprehensions about China’s rising debt levels and the challenges the country encounters in addressing this economic issue.
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