China's Credit Outlook Dims As Fitch Cites Economic Uncertainty And Rising Debt; Reduces Rating

Fitch Ratings has revised China's outlook on the country's sovereign credit rating to negative amidst mounting concerns over fiscal stability. This decision, announced on Wednesday, comes as China grapples with a confluence of challenges, including slowing economic growth and escalating debt levels, amidst its transition to new growth paradigms.

The downgrade, echoing a similar move by Moody's in December, signals apprehensions regarding the resilience of China's public finances. Fitch's decision reflects the intricate balance China must navigate as it endeavours to stimulate a sluggish post-COVID recovery while mitigating the risks posed by burgeoning debt.

Gary Ng, Natixis Asia-Pacific senior economist, contextualizes the outlook revision, noting the strain on China's public finance amid decelerating growth and mounting debt burdens. While stopping short of predicting imminent default, Ng emphasizes the potential for credit divergence among local government financing vehicles, particularly as provincial authorities grapple with weakened fiscal positions.

Fitch anticipates a surge in China's general government deficit to 7.1% of GDP in 2024, up from 5.8% in 2023, marking the highest level since the onset of the COVID-19 pandemic in 2020. Despite this fiscal strain, Fitch maintains China's issuer default rating at 'A+', indicating a moderate degree of credit risk.

S&P, another major rating agency, echoes Fitch's assessment with a comparable 'A+' rating, aligning with Moody's evaluation of China's creditworthiness at A1. However, Fitch forecasts a deceleration in China's economic growth to 4.5% in 2024, slightly lower than the International Monetary Fund's projection of 4.6%.

Despite recent positive economic indicators such as robust factory output and retail sales, Fitch underscores the underlying vulnerabilities in China's economic landscape. The agency points to the transition away from property-dependent growth models as a critical factor contributing to the uncertain economic outlook.

China's fiscal discipline is evident in its plans to reduce the budget deficit to 3% of GDP, accompanied by the issuance of special ultra-long-term treasury bonds totalling 1 trillion Yuan ($138.30 billion). Additionally, local governments have been allocated a special bond issuance quota of 3.9 trillion Yuan, signalling efforts to shore up fiscal stability at sub-national levels.

The mounting debt burden is a pressing concern, with China's debt-to-GDP ratio reaching a record high of 287.8% in 2023. This surge, as highlighted by the National Institution for Finance and Development (NIFD), underscores the imperative for prudent fiscal management and risk mitigation strategies.

In response to Fitch's ratings decision, China's finance ministry expressed regret while reaffirming to address local government debt risks. Emphasizing the strategic role of deficits in stimulating domestic demand and supporting economic growth, the ministry stated the importance of leveraging debt funds judiciously to maintain sovereign creditworthiness.

Moody's warning in December, citing the costs associated with supporting local governments and state-owned enterprises amidst a property crisis, aligns with Fitch's concerns. These warnings show the multifaceted challenges confronting China's economy, and the imperative for proactive measures to safeguard fiscal stability.

*Inputs from Reuters*