Rating agency Fitch said Wednesday that it has revised China’s sovereign credit rating to negative, reflecting the rising risks to the country’s public finance outlook and growing uncertainty surrounding its economic outlook.
Fitch noted that from a ratings perspective, China’s fiscal buffer has been eroded by high deficits and rising government debt in recent years.
“In the coming years, the role of fiscal policy in boosting economic growth is likely to increase, driving debt upwards,” it said in a note.
“Slower nominal growth could lead to an intensification of the challenge of controlling high macroeconomic leverage and raise contingent liability risks.”
The agency has still assigned an “A+” credit rating to China, citing China’s “large and diversified economy, still solid GDP growth prospects relative to peers, integral role in global goods trade, robust external finances and reserve currency status of the yuan.”
However, China scores lower than A-rated countries in terms of high macro leverage, increasing fiscal challenges, Gross National Income per capita and governance.
Fitch also said it expects that the narrowing of the deficit will be a gradual process, as it needs to be balanced with economic growth objectives, but policy measures to support medium-term fiscal reforms are not yet clear.
“LRGs (local and regional governments) have been affected by the property slowdown and some Local Government Financing Vehicles (LGFVs) are facing refinancing pressures,” it said.
“In the past year, some highly indebted regions were permitted to issue about CNY1.4 trillion (US$193.5 billion) in refinancing bonds to bring LGFV debt directly onto their balance sheets; we expect such issuance to continue in 2024. Banks have been requested to support LGFV debt structures through restructurings, while local asset management companies have also stepped in with support.”
Fitch expects the general government debt-to-GDP ratio to remain on an upward trend, reaching 64.2% in 2025 and approaching 70% in 2028, up from the slightly lower 60% forecast in the previous rating.
In response to Fitch’s ratings, China’s Ministry of Finance stated that “Fitch ratings do not effectively reflect prospectively the positive effects of fiscal policy on driving economic growth and thereby stabilizing macro leverage.
“China’s GDP will grow by 5.2% in 2023, contributing more than 30% to the world economy; this year’s target of around 5% is in line with the actual conditions and development needs, and conveys determination and confidence in high-quality development.
“The Ministry of Finance has arranged a certain scale of refinanced government bonds within the local government debt limit to support local governments, especially those in high-risk areas, in resolving the hidden debts of financing platforms and clearing the government’s default on payments to enterprises, so as to alleviate the pressure of concentrating on repayment of maturing debts and to reduce the burden of interest expenses.
“The long-term positive trend of China’s economy has not changed, nor has the Chinese government’s ability and determination to maintain good sovereign credit.”