In a significant development, global ratings agency Moody’s has downgraded the outlook on China’s credit rating from “stable” to “negative.” This decision comes on the heels of mounting debt issues, a struggling post-pandemic recovery, and a series of economic challenges that have cast a shadow over the world’s second-largest economy.
China’s economic woes are multifaceted, with weak consumer and business confidence, a persistent housing crisis, and record youth unemployment taking a toll on the country’s financial health. Additionally, a global economic slowdown is dampening demand for Chinese goods, exacerbating the challenges faced by the nation.
In response to the economic challenges, both central and local governments are under increasing pressure to provide financial support. Beijing’s issuance of a one trillion yuan (US$137 billion) sovereign bond in October was a significant move to address the financial strains. Moody’s decision to downgrade China’s outlook reflects its belief that further government and public sector financial support will be necessary, posing broad downside risks to the country’s fiscal, economic, and institutional strength.
A major contributor to China’s economic challenges is the deepening crisis in the property sector. Some of the nation’s largest developers are grappling with significant debt, raising concerns about potential business failures. This crisis has led to a decline in consumer trust, plummeting home prices, and the risk of contagion affecting other sectors of the economy. The construction and real estate sectors, which together account for around a quarter of China’s GDP, are particularly vulnerable.
In response to the Moody’s downgrade, Beijing’s finance ministry expressed disappointment, stating that Moody’s concerns about China’s economic growth prospects and fiscal sustainability are unwarranted. The ministry highlighted China’s ongoing economic recovery despite a challenging global environment.
Moody’s, however, remains cautious, projecting a 4.0 percent growth for China’s economy in the coming year and 2025. The agency emphasizes that substantial and coordinated reforms are necessary to offset the diminished role of the property sector. Moody’s expects structural factors, including weaker demographics, to drive a decline in potential growth to around 3.5 percent by 2030.
China, the world’s number-two economy, faces a complex economic landscape marked by a property sector debt crisis, weakening demographics, and global economic uncertainties. The Moody’s downgrade serves as a stark warning, underscoring the need for comprehensive reforms to ensure sustained economic growth. The coming months will likely be crucial for China as it navigates these challenges and works towards a more resilient and dynamic economic future.
(Source: AFP | HKFP)
