Fitch cuts China’s ratings outlook on growth risks

BEIJING — Fitch cut its outlook on China’s sovereign credit rating to “negative” on Wednesday, citing risks to public finances as the economy faces increasing uncertainty in its shift to new growth models.

The downgrade follows a similar move by Moody’s in December and comes as Beijing ratchets up efforts to spur a feeble post-COVID recovery in the world’s second-largest economy with fiscal and monetary support.

“Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt,” said Gary Ng, Natixis Asia-Pacific senior economist.

“This does not mean that China will default any time soon, but it is possible to see credit polarization in some LGFVs (local government financing vehicles), especially as provincial governments see weaker fiscal health.”

Fitch expects China’s general government deficit — which covers infrastructure and other official fiscal activity outside the headline budget — to rise to 7.1% of gross domestic product (GDP) in 2024 from 5.8% in 2023, the highest since 8.6% in 2020, when Beijing’s strict COVID curbs weighed heavily on the economy.

While it lowered its ratings to negative outlook from “stable,” indicating a downgrade is possible over the medium term, the agency affirmed China’s issuer default rating at “A+.”

S&P, the other major global rating agency, also rates China “A+,” the equivalent of Moody’s “A1.”

Fitch forecast China’s economic growth would slow to 4.5% in 2024 from 5.2% last year, while the International Monetary Fund expects China’s GDP to grow 4.6% this year.

The ratings warning comes despite tentative signs China’s economy is finding its footing.

Factory output and retail sales topped forecasts in January-February, following better-than-expected exports and consumer inflation indicators.

Those data points have shored up Beijing’s hopes that it can hit what analysts have described as an ambitious GDP growth target of around 5% for 2024.

“The outlook revision reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model,” Fitch said.

“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” it said. “Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.”

China plans to run a budget deficit of 3% of economic output, down from a revised 3.8% last year. Crucially, it plans to issue one trillion yuan ($138.3 billion) in special ultra-long term Treasury bonds, which are not included in the budget.

The special bond issuance quota for local governments was set at 3.9 trillion yuan, versus 3.8 trillion yuan in 2023.

China’s debt-to-GDP ratio climbed to a new record of 287.8% in 2023, 13.5 percentage points higher than a year earlier, according to a report by the National Institution for Finance and Development in January.

China’s finance ministry said following the announcement it regretted Fitch’s ratings decision, vowing to take steps to prevent and resolve risks from local government debt.

“In the long run, maintaining a moderate deficit size and making good use of valuable debt funds is beneficial for expanding domestic demand, supporting economic growth, and ultimately maintaining good sovereign credit,” the ministry said in a statement.

Moody’s in December slapped a downgrade warning on China’s credit rating, citing costs to bail out local governments and state firms and control its property crisis. — Reuters