Experts Assert China’s Ability to Mitigate Debt Challenges

China is on track to effectively manage its hidden local government debt within four to five years, a move not expected to disrupt the nation’s economic recovery or spark systemic financial risks, according to a source close to the issue. This statement comes in response to Moody’s recent downgrade of China’s credit outlook from “stable” to “negative.”

The source highlighted that China’s government debt-to-GDP ratio stands at about 50%, significantly lower than many major economies. Furthermore, China is already addressing half of its local government hidden debt, with stricter regulations preventing new debts from arising. Regions like Guangdong province and Shanghai have successfully mitigated risks associated with implicit local government debt.

China has implemented various strategies to tackle hidden debt issues. These include extending debt maturities, selling assets for debt repayment, and replacing costlier short-term debts with more economical, long-term refinancing bonds.

In contrast to Moody’s downgrade, S&P Global Ratings and Fitch Ratings have maintained their stable outlooks on China. S&P confirmed its A+ long-term rating in June, and Fitch upheld its A+ rating in August. Similarly, China Chengxin International Credit Rating reaffirmed China’s AA+g rating with a stable outlook, noting the economy’s resilience and sufficient fiscal space in 2023.

The issuance of additional government bonds worth 1 trillion yuan, announced in October, is expected to boost local government fiscal space and stimulate investment and economic growth. Despite Moody’s downgrade, experts argue that China’s debt-to-GDP ratio is relatively low compared to other countries, supported by consistent low fiscal deficit rates and strong foreign exchange reserves.

Authorities are focusing on local government financial vehicle debts linked to economic development and facing repayment challenges. Debts from financially stable local government vehicles are not a concern, as they are unlikely to default. 

Fitch Ratings’ Jeremy Zook shared an optimistic view at a conference in Shanghai, suggesting China’s GDP growth in 2023 might surpass the 4.8% forecast and potentially exceed 5%, after a stronger-than-expected performance in the third quarter. This growth outlook takes into account the risks of contingent liabilities.