Moody’s Investors Service cut its outlook for Chinese sovereign bonds to negative from stable today, December 5. The rating company kept its long-term rating on China’s government bonds at A1.
You don’t have to be a forensic accountant to see what worries Moody’s. China is facing a need to bailout a failing property development industry and to rescue local governments that issued too much debt backed by property development projects that now can’t make their coupon payments. Plus the national government just announced a budget deficit that exceeds that long-term limits for the country’s debt to GDP ratio.
In order to make up for the drag from failures in the property development sector–and to support local governments that derive much of their revenue from real estate deals with developers, the Beijing government has shifted fiscal policy snd ramped up borrowing to a likely record for bond issuance this year. Data last week showed both manufacturing and services activities contracting in November. The month before President Xi Jinping signaled that he would not tolerate a sharp slowdown in growth and lingering deflationary risks. In response the government increased its budget deficit to the largest in three decades. At 3.8% for 2023, the deficit-to-GDP ratio is well above a long-observed 3% limit.
