(Beijing) Rating agency Moody’s lowered China’s rating outlook from “stable” to “negative” on Tuesday, due to debt in the world’s second-largest economy.
“The decision to change the outlook to negative reflects growing evidence that the government and public sector […] will provide financial support to regional governments and state-owned enterprises in financial difficulty,” explains Moody’s.
This “poses vast risks […] for the budgetary solidity” of China, estimates the agency in a press release, citing “weaker” economic growth of the Asian giant and difficulties in the real estate sector.
China’s Finance Ministry said it was “disappointed” by Moody’s decision.
China “has the capacity […] to respond to risks and challenges,” he said in a press release criticizing Moody’s “unfounded concerns.”
Real estate, which has long represented around a quarter of China’s GDP with construction, is an essential pillar of the country’s growth.
It is also an important source of income for local authorities, whose finances are drained after three years of staggering expenditure to fight COVID-19.
To revive a struggling sector, the government has stepped up support measures in recent months, but the results remain inconclusive.
Fear of liquidation
The financial setbacks of emblematic real estate groups (Evergrande, Country Garden, etc.) continue to fuel buyer mistrust, against a backdrop of unfinished housing and falling prices per square meter.
The real estate crisis is a major obstacle to economic recovery.
China is aiming for “around 5%” growth this year, a goal that could be difficult to achieve without a massive recovery plan, some economists believe while the government favors targeted measures.
Last year, the Asian giant’s GDP grew by 3%, far from the official target of 5.5%, and at one of the weakest rates in four decades.
The real estate sector in China has experienced meteoric growth since its liberalization in 1998, but its massive debt has been seen in recent years by those in power as a major risk for the country’s economy and financial system.
Beijing has thus gradually tightened the conditions for access to credit for groups from 2020, which has dried up the sources of financing for companies already in debt.
This phenomenon was exacerbated by the near-bankruptcy of the now former number one in the sector, Evergrande, which on Monday obtained a respite until January to present a restructuring plan and avoid liquidation.