Fitch Ratings has revised its outlook on China's sovereign credit to negative, reflecting growing concerns about the country's public finances amidst an increasingly uncertain economic transition. This adjustment aligns with a similar action by Moody's in December and underscores the challenges Beijing faces in sparking a robust post-COVID recovery.
The Roots of the Downgrade
The downgrade to a negative outlook stems from a "double whammy" of decelerating growth and escalating debt, particularly impacting local government financing vehicles (LGFVs). Fitch anticipates a significant rise in both central and local government debt as a percentage of GDP, marking a clear departure from pre-pandemic levels. This situation is exacerbated by a protracted property downturn, severely affecting local governments' fiscal health.
Economic Growth and Public Finance Risks
Fitch's forecast signals a slowdown in economic growth to 4.5% in 2024 from 5.2% last year, a projection slightly below the International Monetary Fund's estimate. This anticipated deceleration comes despite recent data suggesting some resilience in factory output, retail sales, and exports. However, wide fiscal deficits and increasing government debt have eroded fiscal buffers, raising concerns about China's long-term fiscal sustainability.
Government's Response
In response to Fitch's decision, China's finance ministry expressed regret but reaffirmed its commitment to managing and resolving risks associated with local government debt. Planned measures include issuing special ultra-long-term treasury bonds and setting quotas for local government special bond issuances, indicating a proactive stance towards maintaining economic growth and fiscal stability.
Implications for the Future
Fitch's outlook revision highlights fundamental concerns over China's fiscal health and its capacity to drive long-term growth. With private investment lagging, state-backed funding has gained prominence in driving infrastructure spending and supporting high-tech industries. The move by Fitch and Moody's to adjust their outlooks and ratings signals caution, urging China to navigate its economic challenges carefully to maintain sovereign credit integrity and foster sustainable growth.
As China endeavors to transition towards a more sustainable growth model, the government's efforts to steer the economy through turbulent waters will be crucial. The balance between stimulating domestic demand, managing debt, and achieving economic growth targets remains a delicate task in the face of mounting uncertainties.
