Aerial view of residential towers under construction in Hangzhou, China, on March 15, 2024.
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China needs bond market reforms as soaring debt poses significant long-term risks to the country, According to S&P Global.
The ratings agency said in a report on Thursday that despite the government’s efforts, nominal gross domestic product growth has slowed and debt levels remain high.
Analysts noted that “policymakers understand the need to simultaneously control leverage and maintain economic growth” to manage systemic risks in the long term. As a result, local government financing has tightened in recent years.
But market reforms appear to have “taken a back seat” as authorities focus on pressing issues such as resolving the housing crisis, stimulating economic growth and reining in local government debt, S&P said.
Advancing bond market reforms may be necessary to address these challenges “simultaneously” as it could reduce debt levels in the long term, the report said.
large-scale public, private and China’s Hidden Debt There have long been concerns about potential systemic financial risks.
in aprilFitch downgrades China’s sovereign credit rating outlook It was revised down to negative, citing risks to the country’s public finances as the economy faces growing uncertainty.
The rating agency predicts that China’s general government debt may surge to 61.3% of GDP this year from 56.1% in 2023, compared with 38.5% in 2019.
“We expect debt ratios to rise to 64.2% in 2025 and nearly 70% in 2028, up from just under 60% in our previous assessment,” Fitch said.
In its latest report, Standard & Poor’s highlighted that China’s “extraordinary credit expansion” due to high investment and low financing efficiency is one of the main factors exacerbating Beijing’s debt problems.
The ratings agency noted that heavy infrastructure spending and declining profitability also contributed to the debt growth.
China has historically looked to infrastructure as a short-term solution to spur economic growth, especially after the 2008-09 financial crisis.
Resolve risks
In March, the government said it would issue 1 trillion yuan ($138.9 billion) in The 2024 “ultra-long” special treasury bonds support major plans in line with national strategies.
China also stated that it will improve the long-term mechanism for risk prevention and control.
“We will implement a package of measures to resolve existing debt risks and guard against new debt risks,” Beijing said in a government work report.
Standard & Poor’s said in its latest report that controlling debt while maintaining growth requires improving the efficiency of financing investment.
“More efficient credit allocation is key, and corporate bond reform may help lead the way as it is the smallest but most market-driven segment of China’s young bond market,” the agency noted.
— CNBC’s Evelyn Cheng contributed to this report.
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