Fitch has downgraded the outlook on China’s debt as it warned of increased risks to the economy while the country moves away from its reliance on growth from the property sector.
On Wednesday the US-based agency said it had revised China’s sovereign credit rating from stable to negative, saying this reflected the “increasing risks to China’s public finance outlook” as the country “contends with more uncertain economic prospects”.
The downgrade comes amid a prolonged crisis in the country’s property sector that has been running since 2021, when a regulatory crackdown on debt-fuelled construction triggered a liquidity squeeze.
The huge Chinese property company Evergrande was ordered to go into liquidation earlier this year, while last week the rival crisis-hit developer Country Garden suspended trade in its shares in Hong Kong after delaying the publication of its annual financial results.
Beijing has responded with moves to address the issues and recently announced a series of targeted measures to move growth to other parts of the economy.
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This has included steps to help other sectors, including the issuance of billions of dollars in sovereign bonds, aimed at boosting infrastructure spending and spurring consumption.
Fitch said that the country’s economic prospects were uncertain because of this transition away from “property-reliant growth”, to what the government views as a more “sustainable growth model”.
It said: “Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective.”
The agency added that while the Chinese government’s fiscal policy was likely to play an important role in driving growth in the coming years, it could also keep debt on a “steady upward trend”.
Fitch forecasts that the general government deficit will rise to 7.1% of gross domestic product in 2024, from 5.8% in 2023. While it lowered its outlook from “stable”, indicating a downgrade is possible over the medium term, the agency affirmed China’s issuer default rating at A+.
The Chinese government said the decision was “regrettable” and said the ratings methodology had “failed to effectively reflect the positive effects of China’s fiscal policies on boosting economic growth”.
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Beijing last month set a goal of 5% growth for the world’s second biggest economy in 2024.
Lynn Song, chief economist for Greater China at ING, said China needed to strike a careful balancing act. “Fiscal support in our view is important in order to avoid falling … into a negative feedback loop of weak confidence, falling asset prices, and slower economic growth. This will cause government debt levels to rise in the near term,” she said.
“On the other hand, long-term fiscal consolidation efforts remain important. In China’s case, finding a viable alternative for land sales is an important step to take in the medium term, but the obvious solutions to this – like increasing other taxes – are unpalatable.”
Dan Wang, the chief economist of Hang Seng Bank China, said Fitch’s move reflected “fundamental concern” over China’s fiscal health and its ability to drive long-term growth.
Gary Ng, an Asia-Pacific senior economist at Natixis, stressed that the downgrade did not mean China would default any time soon, adding: “Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt.”