Recently, officials of the Ministry of Finance answered questions from journalists on Moody's decision to lower China's sovereign credit rating outlook.

Question: On December 5, Moody's released a report which affirmed China's A1 sovereign credit rating but changed the outlook on China’s credit rating from "stable" to "negative", what is your thought?

Answer: We are disappointed with the decision of Moody’s to change China's sovereign credit rating outlook to negative. Since the beginning of this year, in the face of a complex and severe international situation, and against the background of unstable and weakening global economic recovery, China has continued to improve its macroeconomic recovery, and steadily advanced high-quality development. In particular, since the third quarter, we have seen increasing positive changes and growing endogenous impetus, and the new growth momentum has continued to play a positive role. In the fourth quarter, China's economy is expected to maintain its upturn, and China will remain a key engine for stable global growth. The International Monetary Fund (IMF) expects China's contribution to global growth to exceed 30% this year.

In line with the economic recovery, China’s fiscal revenues have also been recovering. In the first three quarters of this year, national general public budget revenues increased by 8.9% year-on-year, of which national tax revenues increased by 11.9%. This is attributable to the sustained economic recovery and overall upturn since the beginning of this year. Fiscal spending has accelerated reasonably, with expenditures on key sectors well-secured. In the first three quarters, national general public budget expenditures increased by 3.9% year-on-year, and expenditures on key sectors such as social security and employment, education, science and technology, health, agriculture, forestry and water have been well-guaranteed. Local fiscal revenue growths have generally remained positive, with local general public budget revenues growing by 9.1% year-on-year, and nearly half of the regions have seen double-digit growth rates. All these facts show that China's economy is shifting to high-quality development, the new growth momentum is playing its role, and China has the ability to continue to deepen reforms and cope with risks and challenges. The concerns of Moody’s about China's economic growth prospects and fiscal sustainability are unnecessary.

Question: Moody's pointed out the risks related to structurally and persistently lower medium-term economic growth. How do you see China's macroeconomic growth this year and beyond?

Answer: This year is the first year for China's economy to recover from the impact of COVID-19. It has successfully withstood the downward pressure caused by both risks and challenges from overseas and multiple factors at home. Although recovery has fluctuated among different quarters, the economy has generally continued to recover and improve, with GDP growing by 5.2% year-on-year in the first three quarters. The contribution of domestic demand to China's growth continued to increase. Final consumption expenditures contributed to 83.2% of economic growth, pulling up GDP growth by 4.4 percentage points; gross capital formation contributed to 29.8% of economic growth, pulling up GDP growth by 1.6 percentage points. Recent forecasts made by the World Bank, the IMF and the OECD all indicate that China can achieve the expected growth target of 5%.

Looking ahead, China's economy has great resilience and potential, its fundamentals sustaining long-term growth remain unchanged, and it will continue to be an important engine of global growth in the future. China has a strong domestic market, with a population of 1.4 billion and a middle-income group of more than 400 million, which have a great demand potential; employment and prices are generally stable, the scarring effect of COVID is gradually fading, and the economic cycle will be smoother; China will accelerate the building of a new development paradigm, facilitate high-quality development, replace old growth drivers with new ones in an orderly manner, and enhance endogenous power. These factors will aid the Chinese economy to realize effective qualitative improvement and reasonable quantitative growths.

Question: Debt sustainability at the local level has been a key concern of international rating agencies. This time, Moody's specifically raised concerns in this regard, what is your point of view?

Answer: In recent years, through the continuous efforts of relevant departments and local governments, China has established an institutional system to prevent and defuse local government debt risks. The spread and expansion of illegal and disorderly borrowing by local governments has been initially curbed, and local government debt disposal has achieved positive results. By the end of 2022, the national statutory debt balance of local governments was 35.1 trillion yuan; counting in the central government debt balance of 25.9 trillion yuan, which was included in budget management, the national government debt balance was 61 trillion yuan. Based on the preliminary calculation of 2022 GDP of 121.02 trillion yuan, which was released by the National Bureau of Statistics, the statutory debt ratio of the national government (the ratio of government debt balance to GDP) is 50.4%. This is lower than the internationally-recognized warning line of 60%, and also lower than the levels of major market economies and emerging market countries.

As to hidden debts of local governments, in accordance with the decisions and arrangements of the CPC Central Committee and the State Council, the Ministry of Finance, together with relevant departments, has proposed a package of policies and measures to prevent and resolve the hidden debt risks of local governments. First, we improve the regular monitoring mechanism. We strengthen information sharing and coordinated supervision among departments, unify understanding, caliber and supervision, strengthen data comparison and verification, and strive to achieve full supervision coverage. Second, we resolutely curb the growth of hidden debts. We crack down on the "back doors" of illegal debt financing, focus on strengthening control of risk sources, tighten budget constraints, require strict local construction project review, control the financing of new projects, strengthen the control of debt financing of local state-owned enterprises and institutions, prohibit illegal borrowing for local governments in disguised forms, and never allow new hidden debt to be added to new projects. Third, we steadily resolve hidden debt stocks. We establish a market-oriented and law-based debt default disposal mechanism to steadily resolve hidden debt stocks and realize reasonable risk sharing between debtors and creditors according to law. We adhere to categorized and prudent disposal, and correct non-standard behaviors in government investment funds, PPPs, and government purchase services. Fourth, we improve the supervision and accountability mechanism. We introduce a lifelong accountability system with retroactive reviews, and resolutely investigate in and deal with violations of laws and regulations. We urge provincial governments to improve the accountability mechanism to seek, investigate in and deal with those that continue to involve in illegal debt financing practices, and hold them accountable. As a result, the scale of local hidden debt has gradually shrank, and the risks have been mitigated with the joint efforts of relevant departments and local governments.

As to the debts of local government financing vehicles (LGFVs), the Ministry of Finance earnestly implements the decisions and arrangements made by the CPC Central Committee and the State Council, and has taken a series of measures to strengthen the governance of LGFVs. First, we continue to standardize financing management and prohibit the establishment of new LGFVs. Second, we standardize the disclosure of financing information and prohibit the practice of linking it with local government credit. Third, we properly handle the debts and assets of LGFVs, strip away their government financing functions, and prevent local state-owned enterprises and institutions from becoming LGFVs.

Question: Moody's raised the topic of the ongoing downsizing of the property sector, which posed challenges to financial sustainability at the local level. What is your view?

Answer: We attach great importance to local fiscal operation and have taken many measures to support sound operation. First, we actively arrange transfer payments from the central government to local authorities to provide strong support for local economic and social development. Second, we urge local authorities to strengthen fund coordination, optimize the expenditure structure, revitalize the stock of funds, and avoid loss and waste, with a view to improving the efficiency of financial funds. Third, we further improve the local tax system and gradually establish a standardized, stable and sustainable local tax system.

It should be noted that the land transfer revenue is the main component of the local governmental fund budget. The land transfer revenue is a gross revenue, and a reduction in the revenue will also reduce the cost expenditure such as demolition and relocation compensations. In recent years, affected by the real estate market, related tax revenues have declined, but their share in local general public budget revenues has not fallen sharply. On the whole, the impact of the real estate market downturn on the local general public budget and the governmental fund budget is controllable and structural.