Coronavirus-related stimulus and sizeable infrastructure spending will drive a significant rise in overall public sector debt to 45% of GDP in China by 2024 from close to 39% of GDP in 2019, testing the government’s ability to mitigate the associated risks especially amid a slower growth trajectory, said Moody’s Investors Service recently.
“Incorporating all four budgets included in the Work and Budget Reports as presented to the China's National People's Congress, we estimate total fiscal stimulus of 6.5% of GDP, compared to headline stimulus of 3.5%, much more in line with other sovereigns and entailing a significant rise in public sector debt — a credit negative,” said Martin Petch, a Moody’s Vice President and Senior Credit Officer.
Compared to 2008, China’s spending in response to the outbreak appears more targeted and therefore less likely to lead to excess capacity, misallocation of investment and poor rates of return, the credit rating agency pointed out.
In addition, the debt associated with fiscal stimulus this time may increase productivity to a greater extent, given the greater focus on infrastructure related to innovation, the environment and pollution control, and long-term demographic and skills challenges, the firm added.
Over the long term, the effectiveness of government in mitigating the risks from higher public sector debt, especially in a slower growth potential environment, will shape the sovereign's credit profile, according to Moody’s.
While China's policy emphasis has shifted to support for employment, Moody’s expects that there will be ongoing focus on further deleveraging and allocation of investment to more productive areas in the medium term.
“However, China’s capacity to achieve this as potential growth slows will be tested, with leverage in the public sector and the broader economy rising significantly, keeping contingent liabilities, particularly at local state-owned enterprises, as a key source of risk for the sovereign,” Petch noted.