Chinese authorities are acknowledging the escalating risks to their country’s financial stability and overall economic growth, deeming them too substantial to overlook. In response, they are taking a more systematic approach, initiating the replacement of certain hidden debts with new, explicitly recognized government debt.
The primary concern stems from the potential ripple effect of widespread defaults, posing a threat to financial institutions across the nation. If credit markets seize up and anxiety about the financial stability of banks holding significant local-government bonds spreads among retail and corporate depositors, this could rapidly escalate into a nationwide financial crisis.
In a related development, Moody’s downgraded its outlook on US debt to negative from stable, just one week before critical budget negotiations in Congress. While maintaining its Aaa rating on US government debt, Moody’s expressed concerns about the sustainability of the United States’ fiscal deficits in the context of rising interest rates. The agency emphasized the necessity for effective fiscal policy measures to curb government spending or boost revenues.
In response to Moody’s decision, the US Treasury promptly contested the assessment. Deputy Secretary of the Treasury Wally Adeyemo asserted the enduring strength of the American economy and emphasized Treasury securities as the world’s premier safe and liquid assets. He highlighted the Biden Administration’s commitment to fiscal sustainability, citing over $1 trillion in deficit reduction from the June debt limit deal and President Biden’s budget proposals, which aim to decrease the deficit by nearly $2.5 trillion over the next decade.
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China’s Colossal Hidden-Debt Problem Is Coming to a Head
Chinese total private sector debt (level and relative to GDP)
Helps explain why Moody's downgraded China's credit rating today… pic.twitter.com/m3YcOrH81v
— Longview Economics (@Lvieweconomics) December 5, 2023
Moody’s downgrades US debt rating outlook to negative