Moody’s Investors Service on Tuesday cut the outlook on China’s debt to negative from stable citing expectations that the national government will have to step in to rescue regional and local governments.
Moody’s kept China’s long-term rating at A1.
“The change to a negative outlook reflects rising evidence that financial support will be provided by the government and wider public sector to financially-stressed regional and local governments and state-owned enterprises, posing broad downside risks to China’s fiscal, economic and institutional strength,” said the note.
China’s property troubles mean that regional and local governments face a loss of land sale revenue, which accounted for 37% of their revenue in 2022 outside of central government transfers. Moody’s says regions that relied most heavily on land sales won’t be able to offset that revenue loss from other sources.
Moody’s estimates one-third of state-owned enterprises debt — some 40% of GDP — has an interest coverage below 1, which indicates weak debt sustainability. “While not all [state-owned enterprises] are likely to need direct government support, even a moderate proportion doing so over the medium term would represent a significant crystallization of contingent liabilities for the sovereign, increasing the costs of financial support and diminishing fiscal strength,” said Moody’s.