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Fitch Downgrades China’s Credit Outlook to Negative Amid Debt Sustainability Concerns

Fitch Downgrades China’s Credit Outlook to Negative Amid Debt Sustainability Concerns

Apr 11, 2024

Fitch Downgrades China’s Credit Outlook to Negative Amid Debt Sustainability Concerns

Fitch Ratings has revised China's sovereign credit rating outlook to Negative from Stable, citing heightened risks to the country's public finances as it transitions to a new growth model. This move, announced on Tuesday, follows a downgrade by Moody's last December.

"The Outlook revision reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model," Fitch stated in its commentary regarding the ratings action.

Analysts are not surprised by Fitch's move, given China's economic challenges over the past two years. The downgrade accentuates growing concerns over the nation's debt sustainability. Fitch noted that China's deficits and escalating debt have eroded fiscal buffers, and fiscal policy is expected to play a significant role in supporting future growth, which could lead to further increases in debt levels.

Moreover, the agency pointed out that contingent liabilities, such as government guarantees or obligations related to state-owned enterprises, could rise as lower growth makes managing high economy-wide debts more challenging. "We view fiscal risks as higher than suggested by official government debt metrics, given perceptions that certain government-related entities carry implicit government support," Fitch added.

Fitch has estimated that non-financial corporate liabilities were 167 percent of GDP at the end of the third quarter of 2023. The agency suggested that the government may need to provide gradual support through policy institutions and state banks to tackle financial stability issues and safeguard economic and social stability.

Contributing factors to the downgrade also include risks from local government financing vehicles (LGFVs), a growth slowdown, and a departure from the previous financing strategy, which heavily relied on local governments' land sales for revenue.

Despite these challenges, which have been widely discussed, Fitch emphasized that the central government is likely to take on greater fiscal responsibility, which would raise its debt-to-GDP ratio that has historically been relatively low.

According to a report by the National Institution for Finance and Development reported by Caixin Global, China's debt-to-GDP ratio hit a new high in 2023 despite slower borrowing, indicating an economic slowdown. The macro-leverage ratio jumped to 287.8 percent in 2023, a 13.5 percentage-point increase from the previous year.

Lynn Song, chief economist for Greater China at ING, commented on the dilemma policymakers face between increased fiscal spending or consolidation. "While there’s a pressing need to bolster short-term economic growth...prioritizing long-term fiscal consolidation remains crucial," Song wrote in a note viewed by The Epoch Times. He highlighted the risk that short-term stabilization efforts might overshadow long-term consolidation, potentially worsening the debt outlook.

Fitch predicts China's general government deficit to rise to 7.1 percent of GDP in 2024, the highest since 2020, driven by infrastructure and other fiscal activities. The agency affirmed China's issuer default rating at 'A+', but signaled that economic growth is expected to slow to 4.5 percent in 2024 from 5.2 percent last year.

Despite the negative outlook, China has set a GDP growth target of around 5 percent for 2024 and aims to reduce its budget deficit. The country also plans to issue special ultra-long-term treasury bonds and has set a special bond issuance quota for local governments.

China's finance ministry responded to Fitch's decision, promising measures to address risks linked to local government debt and claiming long-term benefits of maintaining a moderate deficit and using debt funds effectively. However, Fitch remains skeptical of the consolidation path and notes uncertainties about reforms to support medium-term budgetary consolidation.

The Epoch Times Article


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