China’s debt risks worsen as economic slowdown and property crisis persist

China’s debt outlook has been downgraded by Moody’s as the country grapples with a slowing economy and a property crisis. Moody’s issued a warning and cut its outlook on the government’s debt from stable to negative, raising concerns about the world’s second-largest economy. This downgrade could potentially lead to a credit rating downgrade, which would impact investors and lenders.
The ongoing economic challenges in China include soaring youth unemployment, weaker global demand affecting the manufacturing industry, and deepening woes in the property sector. Construction companies have halted their projects, leaving customers stranded and raising concerns about insolvency. Local governments, who borrowed billions for infrastructure development and relied on land sales for revenue, are also under significant strain.
Moody’s highlighted that the expected support for local governments and state-owned enterprises presents broad downside risks to China’s fiscal, economic, and institutional strength. Absorbing some of the liabilities would come with material costs, affecting China’s fiscal strength and creditworthiness. The negative outlook indicates the possibility of a credit rating downgrade, which would impact bond and debt investments.
Despite the downgrade, China’s long-term national debt is still rated A1, a strong grade similar to the US and UK. Moody’s maintained this rating due to its expectations of the government managing economic challenges efficiently and in an orderly fashion. However, the downgrade reflects concerns about China’s ability to navigate the property sector slowdown.
China’s finance ministry responded to the downgrade by stating that the country’s long-term prospects remain unchanged and that it can effectively manage the impact of the property sector slowdown. The ministry emphasized the continuous recovery of China’s macroeconomy and steady progress in high-quality development.
While China’s economy has experienced decades of robust growth, the forecast suggests a slowdown in the coming years. According to the International Monetary Fund, China is projected to grow by 5.4% this year, significantly lower than the previous average growth rate of over 8%. By 2028, growth is expected to decline to 3.5%. This slowdown will have a global impact, especially in regions like sub-Saharan Africa, which have seen substantial Chinese investment.
The downgrade in China’s debt outlook serves as a warning sign for both domestic and international investors. It highlights the risks associated with investing in China’s debt and may influence how lenders set interest rates. As China continues to address its economic challenges, close monitoring of the property sector and local government support will be crucial. Investors and lenders need to carefully assess the implications of the downgrade and adjust their strategies accordingly to navigate the evolving landscape of China’s economy.