Moody's Investors Service recently adjusted its outlook for Chinese sovereign bonds, shifting from a stable to a negative perspective while maintaining a long-term A1 rating. This change reflects mounting concerns over China's escalating debt levels, primarily due to extensive fiscal spending intended to bolster local governments and state-owned enterprises, posing potential risks to the nation's economy.
China has been increasing its borrowing to implement fiscal stimulus measures aiming to uplift a slowing economy. This heightened fiscal expenditure has driven the government's fiscal deficit to a historic high, currently at 3.8% of GDP for the ongoing year, up from the previous years' 3%. The increased issuance of bonds serves as a means to generate funds for stimulating economic growth.
The economic growth of the country has been affected by a significant downturn in the real estate sector, contributing to a slowdown in GDP growth.
Moody's pointed out that while the central government is actively addressing challenges posed by local government debt, maintaining financial stability remains a complex task. The government's focus is on averting financial instability and is believed to possess a comprehensive understanding of the financial status of local government financing entities. However, the balancing act of ensuring market stability, preventing moral hazards, and managing the fiscal implications of providing support is notably challenging.
This adjustment in outlook underlines the pressing need for China to navigate its fiscal policies prudently, mitigating risks associated with mounting debt while striving to sustain economic stability and growth.
(With Agency Inputs)
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