Last Tuesday, April 9, Fitch downgraded the outlook on China’s credit rating, explaining the corresponding decision by the fact that currently, this Asian country is facing such negative circumstances as growing financial risks that have arisen against the background of significant problems in the local economic system.
The mentioned outlook has been changed from stable to negative. It is worth noting that this does not mean a deterioration in the assessment of the creditworthiness of the Asian country but increases the likelihood of such a situation. Fitch also kept China’s sovereign bond rating at A+.
In an official statement, the rating agency notes that there is currently an increase in risks to the prospects of the Asian country’s public financial system. Attention is also drawn to the fact that China’s economic prospects are now at a stage that can be described as a kind of transformation. In this case, it implies the transition of the Asian country’s economy from a period of growth based on property to what Beijing sees as a more sustainable model of qualitative development.
Fitch predicts that in the current year, China’s general government deficit will amount to 7.1% of gross domestic product (GDP). It is worth noting that in 2023 the corresponding figure was 5.8%. China’s general government deficit is expected to be the highest this year since 2020 when harsh restrictive measures imposed due to the coronavirus pandemic became a factor of significant pressure on the Asian country’s public offers. It is worth noting that the local economy is still facing the so-called echo of the period of active spread of COVID-19.
The Chinese Ministry of Finance has expressed regret that Fitch has revised the credit rating outlook of the Asian country downwards. The ministry’s statement, published on Wednesday, April 10, notes that at an early stage, local authorities conducted many in-depth consultations with the rating agency’s team, and the report partially reflected Beijing’s position. It was also stated separately that the Fitch methodology, due to its specifics, cannot effectively and prospectively assess fiscal policy as a positive factor affecting the dynamic of economic growth.
A spokeswoman for the Ministry of Foreign Affairs of China, Mao Ning, says that the Asian country’s determination and ability to protect its sovereign creditworthiness remain unchanged. This statement was made during a briefing as part of a response to a question about the revision of the outlook credit rating by Fitch.
The rating agency’s report notes that in the long term, Beijing will be able to increase domestic demand through solutions such as maintaining a moderate deficit and making effective use of precious debt funds. Experts also say that these measures will become a factor of positive impact as a tool to stimulate economic growth. Moreover, Fitch assumes that as part of the mentioned strategy, Beijing will be able to maintain a good sovereign credit
The budget deficit ratio in China for 2024 is set at 3%. This indicator is moderate and contributes to the stable implementation of the tendency of economic growth.
Beijing has set an economic growth target of 5% for this year. The authorities of the Asian country say that this goal corresponds to the conditions that are currently observed in the space of objective reality. The Chinese leadership, the Ministry of Finance in particular, is convinced that the long-term positive tendency in the local economic system has not changed. The government of the Asian country has the capabilities and demonstrates its willingness to maintain good sovereign credit.
Last December, Moody’s downgraded China’s credit rating outlook from stable to negative. In this case, the experts justified their decision on the risks associated with a structural and sustained decline in medium-term economic growth. The protracted crisis in the local real estate sector was also mentioned in this context.
Moreover, in December, Moody’s said that its decision was largely due to an increasing number of signs that Beijing would provide financial support to municipal authorities that faced a shortage of money, and state-owned enterprises. The experts clarified that the implementation of the relevant intentions would provoke serious risks for China. In this case, the negative factors affecting the financial condition of the Asian country, the state of affairs in the economic system, and institutional strength were meant.
Also in December, Moody’s predicted that in 2024, China’s economy will show growth of 4%. Moreover, experts of the rating agency believe that the corresponding dynamic of the mentioned process will continue in 2025. In the longer term, Moody’s assessment of the future of China’s economic system is more pessimistic. Experts of the rating agency expect that in the period from 2026 to 2030, the growth of the Asian country’s economy may slow down to 3.8%. They also do not rule out a drop in the indicator to the 3.5% mark, mentioning in the context of the factors shaping the realism of the realization of such a probability, the deterioration of the demographic situation. The mentioned problem is characterized as structural in terms of the scale of its impact on the future of the Asian country.
Fitch predicts that the Chinese economy will show growth of 4.5% in the current year. This is a significant slowdown in the positive dynamic compared to the result of 2023 when the corresponding indicator was fixed at 5.2%. The International Monetary Fund predicts that China’s economic growth will be 4.6% in 2024.
S&P, another major rating agency, also assigned the Asian country an A+ rating, which is equivalent to Moody’s A1 rating.
Gary Ng, the senior economist at Natixis for the Asia-Pacific region, says that Fitch’s downward revision of the credit rating outlook reflects the more difficult situation with China’s public finances, which are currently under a double blow formed by circumstances such as slowing economic growth and increasing debt. The expert clarified that this does not mean that Beijing will default shortly. At the same time, there is currently a certain polarization in some local government financing vehicles. In this context, it is worth noting that the leaders of the regions of China declare a deterioration in the financial condition.
Fitch expects that the explicit debt of the central and local governments of the Asian country in the current year will amount to 61.3% of GDP. It is worth noting that in 2023, this figure was 56.1%. In 2019, the corresponding figure was 38.5%.
In China, municipal authorities are currently burdened with debts, which are largely the result of falling revenues from land development.
Xiaojia Zhi, an economist at Credit Agricole, says that Fitch’s decision in the short term may be a factor with a negative impact on sentiment in the Chinese market, where there is already a steady low level of confidence.
Hao Hong, chief economist at Grow Investment Group, disagrees with the mentioned rating agency’s opinion. According to the expert, Fitch misunderstood the logic. In this context, Ha Hong stated that there are good and bad debts. According to the expert, in the current conditions, the economic prospects of the Asian country will improve if the government increases the fiscal budget deficit.
Andrew Freris, chief executive officer of Ecognosis Advisory Company, says that China is borrowing in its national currency, which is why there is no threat of a debt crisis similar to that faced by other developing countries. The expert said that Beijing should take care of the internal situation, at the same time noting that this task is not difficult, since a third of the local banking system belongs to the government.
It is worth noting that signs are nowadays being recorded that China’s economic system is on a trajectory of gradual recovery. In January and February of the current year, industrial production and retail sales in the Asian country showed growth that exceeded preliminary expectations. In this case, an important factor impacting the final result was the improvement in Beijing’s export performance.
Chinese authorities have announced plans to issue treasury bonds. This intention can be interpreted as a signal of Beijing’s willingness to shoulder a higher share of the burden of achieving the economic growth target. Municipal authorities are having a hard time coping with the negative financial consequences of slowing budget revenues and falling land sales.
Dan Wang, the chief economist at Hang Seng Bank in China, says that the Fitch credit rating output revision reflects fundamental concerns about the Asian country’s financial condition and its ability to stimulate economic growth in the long term. The expert says that in the context of a decrease in private investment, state-backed financing has become an even more important factor. In this case, the impact on the dynamic of economic growth is implied. State-backed financing is becoming more important, including in the context of investing in infrastructure and providing support to high-tech spheres of activity.
The media notes that Chinese officials have recently become more sensitive to statements and comments about the problems of the Asian country’s economic system. This circumstance is explained by the fact that Beijing is currently trying to strengthen confidence in the economy, which has significantly weakened, and stop the outflow of capital. According to media reports, in December last year, the Chinese leadership announced the need to increase the level of optimism in the framework of public assessments of the condition of the economic system and its prospects.
Frances Cheung, a rates strategist at OCBC, says that Fitch’s decision is likely to have no impact on the political plans of the Asian country. In this context, among other things, it means the central bank’s of China announcement of the one-year medium-term lending facility which is due on April 15. The mentioned indicator is a key interest rate. The expert also talks about Beijing’s generally positive prospects, mentioning taxation power and a steady trend of economic growth.
As we have reported earlier, China’s Premier Li Qiang Assembles Economic Experts to Discuss Current Challenges.
