China needs bond market reforms to rein in rising debt, S&P Global says

The aerial view shows residential buildings under construction in Hangzhou, China on March 15, 2024.

STR | AFP | Getty Images

China needs bond market reforms because rising debt burdens pose significant longer-term risks to the country. according to S&P Global.

Despite the government's efforts, debt levels remain very high even as nominal GDP growth has slowed, the rating agency said in a report on Thursday.

“Policymakers understand the need to simultaneously control debt burdens and sustain economic growth” to manage long-term systemic risks, the analysts noted. As a result, local governments have tightened funding in recent years.

But market reforms appear to have “taken a back seat”, with authorities focusing on tackling pressing issues such as the property crisis, boosting economic growth and keeping local government debt under control, S&P said.

It may be necessary to continue bond market reforms to tackle these challenges “simultaneously” as this could reduce debt levels in the long term, the report said.

Great levels of public, private and hidden debts in China have long raised concerns about potential systemically important financial risks.

In AprilFitch lowered its outlook for Chinese government bonds to negative, citing risks to the country's public finances as the economy faces increasing uncertainty.

The ratings agency forecast that China's government debt could rise to 61.3% of GDP this year, up from 56.1% in 2023 – and worsen from 38.5% in 2019.

“We forecast the debt-to-GDP ratio to rise to 64.2% in 2025 and almost 70% in 2028, higher than our forecast of just under 60% in our previous review,” Fitch said.

In its latest report, S&P highlights China's “extraordinary credit expansion,” driven by high investment and lower financing efficiency, as one of the key factors fueling Beijing's debt problems.

China is experiencing a continuation of its moderate economic recovery, says an economist

Big infrastructure spending and declining profitability have also led to more debt growth, the rating agency said.

China has historically resorted to building infrastructure as a short-term solution to boost economic growth, especially after the 2008-2009 financial crisis.

Defuse risks

Nomura Research: China faces a 'balance sheet recession'

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