Fitch downgrades China rating outlook to ‘negative’ as debts pile up

SINGAPORE (ICIS)–China’s fiscal challenges amid rising government debt and its prolonged property slump weighing on recovery prospects prompted Fitch to revise down its credit rating outlook for the world’s second-biggest economy to “negative” from “stable”.

Fitch has, nonetheless, affirmed China’s investment grade long-term foreign-currency issuer default rating (IDR) of “A+”.

• Deficit-to-GDP ratio to rise to 7.1%; reduction plan to be gradual
• GDP growth forecast to slow to 4.5%
• Prolonged deflation ruled out

“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,” the ratings firm said in a report released late on 9 April.

Fitch forecasts China’s fiscal deficit to rise to 7.1% of GDP in 2024, from 5.8% in the previous year. It will be the highest since 2020, when the country’s fiscal deficit-to-GDP ratio hit 8.6%, and more than double the pre-pandemic average of 3.1% in 2015-2019.

“The central government (CG) will shoulder a greater share of the fiscal burden in 2024, as local and regional government (LRG) finances remain constrained from declines in land-related revenue and high debt burdens,” it said.

China’s central government plans to issue Chinese yuan (CNY) 1 trillion ($138bn), equivalent to 0.8% of GDP, worth of ultra-long bonds, on top of a bond issuance of the same size in 2023.

“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” Fitch said.

“Fitch believes that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend,” it added.

“We expect deficit reduction to be gradual as it will likely be balanced against economic growth objectives,” the ratings firm said.

“There is little clarity on reform measures to support medium-term fiscal consolidation. The revenue base has also eroded, as a result of tax relief measures since 2018 and a weaker outlook for property-related revenue (20%-30% of total LRG revenue),” it added.

Gloom continued to surround China’s property sector, with some major developers facing liquidation, dampening optimism over recent upbeat data on manufacturing.

Home prices in the country continued to decline, with contract sales volume of top 100 Chinese developers at record lows.

China’s investment grade rating, however, “is supported by its 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”.

The economy is projected to post a slower growth of 4.5% this year, compared with the actual pace of 5.2% in 2023, according to Fitch Ratings. The GDP growth forecast was also lower than the government’s target of about 5%.

China had a six-month bout with deflation in consumer prices which ended in February, when demand was boosted by the week-long Lunar New Year holiday.

“We do not forecast a prolonged period of deflation, with inflation of 0.7% by end-2024 and 1.3% by end-2025,” it said.

“Even so, risks are tilted to the downside and inflation could remain lower than we forecast, further weighing on the nominal GDP growth outlook,” Fitch added.

Focus article by Pearl Bantillo

($1 = CNY7.23)

Thumbnail image: At the Dapukou container terminal at Zhoushan port in Zhejiang province, China, on 9 April 2024 (Costfoto/NurPhoto/Shutterstock)