Moody's Raises China Credit Outlook to Stable Amid Concerns Over Growing Debt Burden

Moody's Upgrades China's Credit Outlook to Stable

Moody's Ratings has revised China's credit outlook to stable from negative, reflecting the government's ability to cope with risks stemming from its swelling debt load. The upgrade, announced on Monday, is a testament to China's economic resilience in the face of ongoing domestic, trade, and geopolitical challenges.

According to Moody's, the upgrade reflects its assessment that China's economic and fiscal strength will remain resilient despite the government's growing debt burden. Fiscal pressures will persist, and the government's debt burden will continue to increase for the foreseeable future, but with contained downside risks. The company has affirmed China's long-term rating at A1, where it has been for nine years, keeping it four notches below the top ranking and on par with Japan, Kuwait, and Belgium.

China's Economic Growth Prospects

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Moody's has turned more upbeat on China's growth prospects since lowering its outlook to negative in late 2023. China's economic growth is on track to reach 4.5% in 2026 and 4.2% in 2027, far more than Moody's had forecast three years ago. The rating company believes the government now has the "space for the continuity of policies to address structural challenges without extending significantly larger policy support."

The A1 rating already incorporates an erosion in the strength of public finances, with the government's debt burden rising by over 20 percentage points in the past five years to 68.5% of gross domestic product. Moody's expects debt to reach 82.4% of GDP next year and exceed 90% by the end of the decade.

Note: The table shows the expected combined debt of the central and local governments as a percentage of GDP at the end of each year, as forecast by Moody's and Bloomberg Economics.

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Market Reaction

The onshore yuan was little changed at around 6.8 per dollar on Tuesday, while the yield on 10-year government bonds held near 1.8%. China's Ministry of Finance welcomed the announcement by Moody's, pledging to continue pushing for economic restructuring and strengthening fiscal sustainability.

The country's export competitiveness means GDP growth will slow "only gradually over the medium term" as policymakers are expected to manage the campaign to rein in local debt risks "in a controlled fashion," according to Moody's. China's economic strength provides very significant support to the rating, the company added.