China's debt outlook downgraded as economy slows

Image source, Getty Images

Image caption, Some of China's largest construction companies are facing insolvency

The risks from China's debt pile are mounting as the country grapples with an economic slowdown and property crisis, a leading credit ratings agency has said.

Moody's issued the warning as it cut its outlook on the government's debt to negative, from stable.

The firm is the latest to raise concern about problems facing the world's second-largest economy.

China said it was disappointed by the move, calling the economy resilient.

The country has signalled plans to ramp up stimulus spending, as it battles soaring youth unemployment, weaker global demand hitting its manufacturing industry and deepening woes in the property sector.

Some of the country's largest construction companies are facing insolvency and have stopped building, leaving customers stranded.

Local governments, which have borrowed billions to build infrastructure and relied on land sales to bring in revenue, are also under strain.

Moody's said the expected support for the local governments and other state-owned enterprises presented "broad downside risks to China's fiscal, economic and institutional strength".

Absorbing even some of the liabilities would be accompanied by "material costs, which would undermine China's fiscal strength and potentially its creditworthiness", it said.

Inside Malaysia's Chinese-built 'ghost city'
Couple's property ordeal captivates Chinese internet

The negative outlook is a sign that Moody's could downgrade China's credit rating, which is used by investors to help assess risks associated with investing in bonds and other debt and helps inform how lenders set interest rates.

The US, which has seen its national borrowing soar, is among the countries to have faced a debt downgrade in recent years.

For now, however, Moody's kept intact the A1 rating for China's long term national debt, a strong grade slightly lower than that of the US and UK.

It said that reflected expectations the government would manage its economic challenges in an "orderly fashion".

China's finance ministry said the country's long-term prospects had not changed and it expected to be able to manage the impact of the property sector slowdown.

"China's macroeconomy continues to recover and high-quality development is steadily advancing," it said. "It is unnecessary for Moody's to worry about China's economic growth prospects and fiscal sustainability."

After decades of seeing its economy expand by more than 8% a year, China is on track to grow by 5.4% this year. However, growth is likely to slow to 3.5% by 2028, according to a forecast from the International Monetary Fund.

International economic groups have warned that the slowdown in China will weigh on the global economy in the years ahead, especially in regions such as sub-Saharan Africa which had seen an influx of Chinese investment.