Agencies
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 outlook 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 explicit central and local government debt to rise to 61.3 percent of gross domestic product (GDP) in 2024 from 56.1 percent in 2023 - a clear deterioration from 38.5 percentin 2019.
A protracted property downturn has weighed heavily on debt-laden local governments as their revenues from land development plunged, rendering debt levels in many cities unsustainable.
At the same time, the rating agency expects China’s general government deficit - which covers infrastructure and other official fiscal activity outside the headline budget - to rise to 7.1 percent of GDP in 2024 from 5.8 percent in 2023, the highest since 8.6 percent 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, Fitch affirmed China’s issuer default rating at ‘A+’, its third-highest category.
