Moody's affirms China's A1 rating, keeps outlook negative

The rating is affirmed based on the country’s large, diversified, and innovation-driven economy, which continues to display resilience despite an anticipated decline in potential growth to 3.5-4 per cent by 2030.

China has shown signs of improving growth quality, with high-productivity sectors expanding rapidly, including advancements in innovation and artificial intelligence. This structural shift is bolstering economic resilience, even as traditional sectors such as real estate continue to contract, Moody’s said in its latest report.

The affirmation also considers China’s strong debt absorption capacity, supported by large domestic savings, a predominantly state-owned financial system, and capital controls that limit capital flight during stress periods.

While general government debt is projected to rise to around 86 per cent of GDP by 2028, from under 38 per cent in 2019, it remains mostly denominated in domestic currency and bears a relatively low interest cost.

The negative outlook reflects evolving risks in the global trade landscape, particularly due to heightened trade tensions between China and its major partners, including the United States.

Moody’s highlighted that even with recent de-escalation efforts, tariffs and trade barriers are likely to remain elevated, posing downside risks to China’s growth outlook and export performance. These challenges threaten China's transition to a more productivity-led economic model and may force policy responses that further elevate fiscal deficits and debt levels.

Although earlier concerns around central government support to local governments and state-owned enterprises (SOEs) have diminished, risks from global trade realignment and subdued domestic consumption continue to weigh on credit fundamentals. Moody’s noted that government efforts to stimulate consumption remain short-term in nature, while deeper structural reforms—such as expanding healthcare access or enhancing the social safety net—appear unlikely soon.

China’s local-currency country ceiling remains at Aaa, four notches above its sovereign rating, indicating low external vulnerability and a relatively predictable institutional framework, despite the state’s strong presence in the economy. The foreign-currency ceiling remains at Aa1, one notch below the local ceiling, due to strong policy effectiveness and low external debt, offset by continued capital account controls, which introduce limited convertibility risks, added the report.

ALCHEMPro News Desk (SG)