Moody's downgrades China's rating outlook to negative due to indebtedness

For the Chinese government, this is a serious alert. Moody's downgraded its credit rating outlook to negative from stable. The financial rating agency is concerned about the growing risks of rather weak economic growth. She denounces the increase in the debt of local authorities, which “will force the authorities to financially support local governments and indebted state enterprises” and the worsening of the crisis in the real estate sector.

In reaction to Moody's decision, the Minister of Finance assured that the economy will progress and that the risks linked to real estate and local debt are controllable. But, after the recession of the entire sector in 2022, large real estate groups such as Evergrande or Country Garden continue to do poorly. Their sales fell by half compared to last year over the first three quarters of 2023. And five of the largest groups defaulted on their debt or were unable to honor certain deadlines.

The “some signs of market stabilization” recorded in real estate prices and the level of new construction will especially benefit large coastal cities, estimate analysts from the firm Global Sovereign Advisory, which advises States on the management of their debts.

As for local authorities in debt, they still represent a major risk for the economy. After overinvesting for years, they suffered from soaring costs due to the pandemic. They must now face the fall in their main revenues, income from the sale of land. Their overall debt reaches 92,000 billion yuan (11,900 billion euros). This prompted the authorities to unveil in October a plan to issue 1 trillion yuan of sovereign bonds by the end of the year to help revive activity. Beijing has also increased its budget deficit target for 2023, bringing it to 3.8% of GDP, compared to 3% originally.

The government is expected to announce its growth forecasts for next year at the economic meeting scheduled for mid-December. Moody's indicated on Tuesday that it saw it slowing to 4% in 2024 and 2025 and falling a little further to 3.8% in the following years.

This annual meeting will send an important signal to investors about the extent of aid that Beijing is ready to offer to the world's second largest economy. They are indeed looking for indicators on how the Chinese authorities intend to stem the liquidity crisis facing developers and support local governments in difficulty.

China's economy has struggled to begin a strong recovery from the Covid-19 pandemic. Beyond the problems of the real estate sector and local authorities, the slowdown in global growth and geopolitical tensions have slowed its momentum. In November, manufacturing activity contracted for the second consecutive month, calling into question economic dynamics, despite the series of measures taken by Beijing since mid-2023 to stimulate confidence and growth.

Pan Gongsheng, governor of the Chinese central bank, last week warned the bankers he met in Hong Kong that the difficulties would probably worsen next year.

China's trading partners, for their part, are concerned about seeing Beijing injecting more and more funds into the country's manufacturing industry, via bank credits. This while China is recording record trade surpluses with many of its partners.

“There is obvious overcapacity in China, and this overcapacity will be exported, particularly if it is fueled by direct and indirect subsidies,” lamented the President of the European Commission, Ursula von der Leyen, last month. “European leaders will not tolerate an imbalance in trade over the long term,” she declared on Tuesday, two days before a summit between China and the EU in Beijing. Stressing that the European Union's trade deficit with China had doubled in two years to reach a record figure of 390 billion euros in 2022. And that Chinese exports to the EU were three times greater than those of the EU towards China.