Global rating agency Fitch has revised its outlook on China’s sovereign credit rating to negative from stable, citing mounting risks to public finances as the world’s second-largest economy navigates a complex transition to new growth models.
The outlook downgrade follows a similar move by Moody’s late last year and comes as Beijing intensifies efforts to revive a faltering post-COVID economic recovery through fiscal and monetary stimulus measures.
“Fitch’s outlook revision reflects the increasingly challenging situation in China’s public finance, stemming from the dual pressures of decelerating growth and rising debt levels,” said Gary Ng, Natixis Asia-Pacific senior economist. “While this doesn’t signal an imminent default risk, it does raise concerns over potential credit polarization among local government financing vehicles (LGFVs), especially as provincial governments grapple with weaker fiscal health.”
Fitch now expects China’s general government deficit, which includes infrastructure and other off-budget fiscal activities, to surge to 7.8% of GDP in 2024, up from an estimated 6.5% in 2023 – the highest level since the 8.6% recorded in 2020 when Beijing’s draconian COVID curbs dealt a severe blow to the economy.
While lowering its outlook to negative, signaling a potential downgrade over the medium term, Fitch affirmed China’s long-term foreign-currency issuer default rating at ‘A+’.
S&P Global Ratings and Moody’s currently rate China at A+ and A1, respectively.
Fitch forecasts China’s economic growth to decelerate to 4.3% in 2024, down from an estimated 5.1% last year, while the International Monetary Fund projects a 4.6% expansion.
The ratings warning comes despite emerging signs that China’s economy is regaining its footing after a turbulent 2022. Recent data on factory output, retail sales, exports, and consumer inflation have topped expectations, bolstering Beijing’s hopes of achieving its projected GDP growth target of around 5.0% for 2024 – a figure many analysts consider ambitious.
“The outlook revision reflects increasing risks to China’s public finance outlook as the country grapples with more uncertain economic prospects amid a transition away from property-driven growth to what the government views as a more sustainable growth model,” Fitch said in its report.
“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” the agency added. “Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.”
In a bid to support growth, China plans to run a budget deficit of 3% of GDP in 2024, down from a revised 3.8% last year. However, it will also issue 1.2 trillion yuan ($173 billion) in special ultra-long-term treasury bonds, which are not included in the official budget figures. The special bond issuance quota for local governments has been set at 4.1 trillion yuan, up from 3.8 trillion yuan in 2023.
China’s debt-to-GDP ratio climbed to a record 295.6% in 2023, according to the latest estimates from the National Institution for Finance and Development (NIFD), underscoring the nation’s mounting debt burden.
In response to Fitch’s decision, China’s finance ministry expressed regret and vowed to take steps to prevent and mitigate risks stemming from local government debt.
“In the long run, maintaining a moderate deficit size and making effective use of debt funds is crucial for boosting domestic demand, supporting economic growth, and ultimately preserving a strong sovereign credit profile,” the ministry said in a statement.
