China’s Finance Ministry strongly contested the recent assessment by Fitch Ratings on Wednesday. In a detailed report, Fitch maintained China’s A+ rating for its sovereign debt but shifted the country’s outlook from stable to negative. The rating agency cited elevating risks in public finances as core concerns, especially considering how China has been grappling with burgeoning local and regional government debts. Fitch warns that such financial pressures are intensifying as China endeavours to transition from an economy heavily dependent on the debt-laden property sector.
Despite the challenges poised by slower growth and increased borrowing, Fitch acknowledged China’s robust economic fundamentals by preserving its A+ rating. The ‘large and diversified economy,’ global trade significance, and substantial foreign exchange reserves were highlighted as justifications for maintaining the rating.
Reacting to Fitch’s outlook revision, the Finance Ministry expressed regret, describing it as “a pity.” It criticized the agency’s methodology, arguing that it overlooked the Chinese government’s efforts to enhance the quality and efficiency of fiscal expenditures appropriately. The Ministry contended that a moderate deficit and prudent utilization of debt resources are instrumental in bolstering domestic demand, fostering economic growth, and thereby sustaining a solid sovereign credit profile.
The Ministry offered reassurances about the control over the risks associated with the country’s debt, stating, “Overall, our country’s local government debt resolution work is progressing in an orderly manner and risks are generally controllable.”
In its report, Fitch pointed out the expected rise in China’s general government deficit to 7.1% of GDP for the current year, a noticeable increase from 5.8% in 2023. This figure contrasts with the 3.0% median for countries within the ‘A’ rating band. Preceding the COVID-19 pandemic, China’s average deficit to GDP ratio was 3.1% from 2015 to 2019, but it surged to 8.6% in 2020 amid the crisis.
According to Fitch, tax relief measures and the current slump in property investments, which were typically significant for local tax revenue generation, have cut down the government’s tax collection ability even in the face of higher expenditures. Challenging consumer spending and downturns in the property sector have led Fitch to forecast a deceleration in 2023 growth projections for China to 4.5%, down from 5.2% the previous year. Nevertheless, the agency anticipates that intensified government spending will counterbalance some of the economic softness.
The tremors from the financial distress of property developers, post an official crackdown on excessive borrowing, have now started affecting construction companies and other sectors tied closely to real estate. This scenario further complicates the financial landscape as the risks proliferate beyond the initial trouble spots.
Adding to the burden of a somewhat bleak outlook, another prominent rating agency, Moody’s, had revised China’s credit rating outlook to negative in December, indicating a trend of wary assessments from financial watchdogs. Similarly, economists from ING, in their Wednesday report, observed a rapid deterioration in China’s debt situation since the pandemic. They emphasized the difficult position policymakers are in: fostering growth and confidence is imperative for maintaining debt sustainability, yet it is equally crucial that fiscal spending targets productive areas conducive to future growth.
The actions and policies of China’s government in the coming months will be closely monitored as they attempt to navigate through these fiscal challenges while striving to maintain a stable and prospering economy.
