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Ratings agency Moody’s cut its outlook on the Chinese government’s credit rating to negative from stable, saying support from Beijing and possible bailouts for distressed local governments and state-owned enterprises would weaken China’s financial, economic and institutional strength.

Moody’s, however, maintained China’s “A1” long-term rating for the country’s government bonds, but expected China’s annual GDP growth to average 4% in 2024 and 2025 and 3.8% in 2026 to 2030 % will slow down.

Structural factors, including weak demographics, would lead to a decline to 3.5% by 2030, it said.

The move underscores concerns about rising debt levels and the impact on overall growth in the world’s second-largest economy, as Beijing resorts to fiscal stimulus to support local governments and contain the deepening debt crisis among the country’s real estate developers.

“The change in outlook also reflects the increased risks associated with structurally and persistently lower risks
medium-term economic growth and the continued downsizing of the real estate sector,” Moody’s said in a statement released on December 5.

“These trends underscore the increasing risks associated with policy effectiveness, including the challenge of designing and implementing policies that support economic realignment while preventing moral hazard and containing the impact on the government’s balance sheet,” Moody’s added.

China’s credit default swaps (the cost of insuring against a sovereign default) rose 4 basis points from Monday’s closing level, according to Reuters data.

Disappointment in Beijing

China’s Finance Ministry expressed disappointment at Moody’s downgrade decision.

“Moody’s concerns about China’s economic growth prospects and financial sustainability are unnecessary,” the ministry said in a statement on Tuesday.

“Since the beginning of this year, in the face of the complex and serious international situation and against the background of the unstable global economic recovery and slowing momentum, China’s macroeconomy has continued to recover and steadily advance high-quality development,” the ministry added.

The central government announced on Oct. 24 that it had formalized a process allowing local governments to borrow for the coming year – starting with the previous fourth quarter, according to an announcement by state media.

Beijing also announced a rare mid-year budget overhaul that included issuing 1 trillion yuan ($137 billion) of government debt – one of the biggest changes to the national budget in years. The amount was intended for reconstruction of areas severely affected by natural disasters – such as the historic floods this summer – and for disaster preparedness.

Moody’s also cited the 1.6 trillion yuan increase in central government transfers to regional and local governments in 2022 over 2021, which partially but only temporarily offset the 2 trillion yuan in lost revenue from land sales, as an important development, which took his considerations into account.

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