Moody's Lifts China Outlook to Stable; Debt Burden Soars

Moody's move to upgrade China's sovereign credit outlook to stable from negative, while affirming its A1 rating, signals confidence in the nation's ability to manage domestic and geopolitical challenges. The rating, unchanged for nine years, reflects the economy's strengths, including its diversification and export competitiveness. Economists forecast GDP growth at approximately 4.5% in 2026 and 4.2% in 2027, which Moody's notes provides policymakers room to address structural issues. The Ministry of Finance welcomed the assessment, stating it will "respond to uncertainties in the external environment with the certainty of our sustained, healthy economic and social development." The prior negative outlook, set in December 2023, stemmed from concerns over the property sector and fiscal strength; the current stable outlook suggests these risks are now seen as better contained.

Debt Levels Outpace Peers

However, the stable outlook is juxtaposed with a rapidly growing debt burden. Moody's forecasts government debt to rise from 68.5% of GDP in 2025 to 82.4% by 2027, with projections suggesting it could surpass 90% by the end of the decade. This trend significantly exceeds the 'A' category median debt level of around 57% of GDP, according to Fitch Ratings. Bloomberg Economics predicts combined central and local government debt could reach 101% by 2034. Other major agencies rate China stably: S&P at A+ and Fitch at A. The A1 rating places China alongside countries like Japan, Kuwait, and Belgium. While Moody's acknowledges geopolitical tensions, including US-China competition, as credit risks, it believes China's economic and fiscal strength can withstand them. Efforts to control "hidden" debt from regional authorities are ongoing, but the overall debt level continues to climb.

Concerns Over Debt Trajectory Remain

Despite Moody's stable outlook, concerns persist regarding China's escalating debt. Fitch Ratings, which downgraded China to 'A' in April 2025, cited the worsening debt trajectory, projecting it to reach 74.2% in 2026 – well above the 'A' category average. While Moody's expects China to manage rising debt using its domestic savings, low interest rates, and capital controls, these factors could face pressure. Geopolitical risks, as Fitch noted, can hinder fiscal consolidation and economic growth. The lack of rating upgrades for China since 2012, despite economic expansion, suggests underlying structural issues may limit its credit potential. Proving the long-term sustainability of efforts to reduce "hidden" debt remains a challenge, with risks of liabilities re-emerging. China's ongoing government borrowing to support its economy, expected to result in an 8.4% deficit in 2025 according to Fitch, puts it in a more challenging fiscal position compared to some similarly rated peers.

China's Future Economic Strategy

Looking ahead, China's economic strategy prioritizes "new quality productive forces," focusing on high-tech sectors, advanced manufacturing, and green energy, as detailed in its 15th Five-Year Plan (2026-2030). The Ministry of Finance plans a proactive fiscal policy for 2026, increasing spending to support employment, businesses, and markets while managing deficits and debt for key initiatives. Analysts at UBS and DBS forecast GDP growth of 4.5% for 2026, while Goldman Sachs expects 4.8%, driven by export strength. This shift aims to counter property sector weakness and stimulate domestic demand, though challenges like low household consumption and labor market softness persist. The focus on technological self-reliance and decarbonization signals a long-term vision for a more resilient economy, essential for managing its debt profile.