In another blow to the Chinese economy, the rating agency Moody’s announced on Tuesday that it had issued a negative outlook on the financial health of the Chinese government.
Moody’s said it was concerned about the potential cost to the national government of bailing out debt-ridden regional and local governments and state-owned enterprises. Moody’s, which previously viewed China’s finances as stable, warned that the country’s economy is settling into slower growth as its huge real estate sector has started to contract.
China’s Finance Ministry immediately responded, saying China’s economy was resilient and local government budgets could withstand the loss of revenue from the country’s real estate downturn.
At the same time, Moody’s reaffirmed the Chinese government’s A1 overall credit rating, which is roughly in the middle of the scale of what is considered “investment grade” or generally low risk. A negative outlook on a credit rating is not necessarily followed quickly by a downgrade of the rating, but it serves as a warning that the existing rating may not be sustainable.
The lowering of the credit outlook remains an important step for the Chinese economy.
Until recently, China had seemingly unlimited money to spend on the world’s largest high-speed rail network, a vast military buildup, subsidies to manufacturers and massive overseas construction projects.
Today, China faces increasingly severe fiscal constraints, triggered primarily by a sharp decline in the real estate sector. The construction of apartments, factories, office towers and other projects constitutes the country’s largest industry, accounting for 25 percent of economic output. Apartments are also the main investment for most households, accounting for three-fifths or more of their savings.
Although Chinese national government borrowing has been limited, local and regional governments and state-owned enterprises have borrowed heavily over the past 15 years. The money that local governments raised from lenders generated strong economic growth, but many are now in deep trouble.
For China, the change in credit outlook will have little direct effect on its finances. Unlike many countries, China relies very little on foreign borrowing. The national government mainly sells bonds to the country’s public banks. The country’s regional and local governments as well as state-owned companies also sell them bonds.
Beijing had highlighted China’s economic leadership during the global financial crisis of 2008 and 2009, when the American real estate market suffered a sharp correction. Today, China is facing a similar, if not larger, real estate downturn. Dozens of major property developers are insolvent and unable to complete the hundreds of thousands of apartments for which they had already accepted large deposits.
Developers left behind hundreds of billions of dollars in overdue bills to small businesses and other entrepreneurs, triggering a cascade of payment problems. With the exception of a few state-owned companies, developers have mostly stopped purchasing land for future housing construction.
Land sales were the main source of income for local authorities. Many of them are now facing a crisis as revenues from these sales have fallen. In its Tuesday statement, Moody’s said the national government will likely need to help those governments cope.
The housing sector’s woes have slowed economic growth, contributed to high youth unemployment and pushed many families to spend money.
“The change in outlook also reflects increased risks from structurally persistent medium-term economic growth and continued downsizing in the real estate sector,” Moody’s said.
China’s Finance Ministry rejected Moody’s arguments. He said that even as local government revenues from land sales have failed, those same governments are also spending less to compensate residents whose homes are bulldozed to make way for new buildings. The ministry also said China’s economy still enjoys considerable momentum.
China is not the only one to be the target of Moody’s concerns. The agency lowered its credit outlook for the United States to negative last month while reaffirming the country’s AAA rating, the highest level.
Overall debt is now higher in China, relative to the size of its economy, than in the United States.
China’s credit rating was last downgraded in 2017 by Moody’s and S&P Global Ratings. More recently, S&P has expressed less concern than Moody’s about the Chinese economy. Hours before Moody’s announcement Tuesday, S&P said it believed China could avoid repeating Japan’s “lost decade” of weak economic activity following the housing crisis of the early 1990s.
Fitch Ratings told Bloomberg television earlier this year that it might reconsider China’s sovereign bond credit rating, but recently reaffirmed the rating with a stable outlook.
China’s economy this year has strengthened a difficult emergence after nearly three years of strict “zero Covid” measures, including many of the world’s longest and strictest municipal lockdowns.
The economy grew by 5.3 percent annually from July to September. Manufacturer investments are fueled by debt and fairly robust spending at restaurants and hotels is offset. a decline in apartment construction.
Data for October and November are mixed. Investment remains high in new factories that make electric cars and other advanced products. But the arrival of cold weather caused a wave of respiratory illnesses in a large part of China, first among children but also among adults. This has emptied many restaurants and other places in the service sector.
Moody’s said the large size of China’s economy, which is the world’s second-largest economy after the United States, gave it considerable capacity to absorb shocks. The Finance Ministry agreed, saying “positive long-term fundamentals have not changed and will remain an important driver of global economic growth in the future.”
