2023-12-05 10:17:09
The credit rating downgrade is yet another setback for the Chinese government following the financial crisis and the challenges posed by the spread of childhood lung disease. Moody’s Investors Service, a global rating agency, has downgraded the outlook for the Chinese economy. The rating has been downgraded to ‘Negative’ from ‘stable’, the relatively high rating given to Chinese government bonds.
What is the reason?
China’s credit rating has been downgraded by Moody’s, pointing out that China’s economic growth in the medium term (up to a few years) is likely to be lower than previously estimated and expected. The report of the rating agency pointed out that the structural risk factors of the Chinese economy have increased and the debt has increased as the main reasons.
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The Chinese government’s widespread provision of financial assistance to distressed public sector enterprises and local governments is a clear indication of increasing risk factors. Similarly, the debt crisis in China’s vast real estate sector has also contributed to the downgrade. China’s major builders and construction companies are saddled with billions of dollars in debt and some giants have defaulted on repayments. The real estate sector also contributed a quarter of China’s gross domestic product (GDP).
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Similarly, following the Covid pandemic, the Chinese economy was hit once more with weak response from consumers and investors. The crisis in the housing sector, youth unemployment at record levels and global demand for the country’s products are negative factors. At the same time, the government representatives described Moody’s downgrade as disappointing.
GDP growth will slow down
Moody’s rating agency now expects China’s annual GDP growth to be around 4 percent in 2024 and 2025. According to Moody’s report, GDP growth will be 3.8 percent in the period from 2026 to 2030.
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Previous downgrading
Earlier in 2017, China’s credit rating was downgraded by Moody’s. It was then downgraded from A3 (Triple A) rating to A1. It was also the first downgrade of Chinese government bonds since 1989.
Another global rating agency S&P Global Ratings also downgraded China to A+ rating in 2017. But this time also S&P has given the same rating to China. Similarly, at the beginning of this year, Fitch Ratings, a leading global rating agency, said it would downgrade China’s credit rating. But still the rating has been maintained as stable.
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