China’s Economic Forecast Dims: Fitch Revises Outlook to Negative
In a significant move that signals growing concern over China’s economic trajectory, Fitch Ratings has revised its outlook on China’s long-term foreign-currency issuer default rating to ‘negative’ from ‘stable’. This adjustment reflects the heightened risks to China’s public finance outlook as the country grapples 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 downgrade comes at a time when China is facing multiple economic headwinds. The ongoing recalibration of its growth model, coupled with the global economic slowdown and the lingering effects of the pandemic, has put considerable strain on the country’s financial stability. Fitch’s decision underscores the challenges China faces in maintaining its economic momentum while managing the risks associated with high levels of debt and a cooling property market.
Fitch has maintained China’s sovereign bond rating at ‘A+’, but the negative outlook indicates that there is a greater likelihood of a downgrade in the future if the economic situation deteriorates further. The agency cites concerns over widening deficits and the government’s ability to implement reforms as key factors in its reassessment. It projects that the general government deficit will rise to 7.1% of gross domestic product (GDP) in 2024, up from 5.8% last year, marking the highest deficit since 2020 when pandemic-related controls began to weigh heavily on public coffers.
China’s Finance Ministry has expressed regret over Fitch’s revision, stating that the report only partly reflected China’s views and that the agency’s methodology fails to effectively and prospectively reflect the positive role of fiscal policy in promoting economic growth. The ministry has emphasized that maintaining a moderate deficit and making good use of debt funds will help expand domestic demand, support economic growth, and ultimately help maintain good sovereign credit.
The fiscal budget deficit ratio for 2024 is set at 3%, which the ministry describes as “overall moderate” and “conducive to stable economic growth”. The ministry has targeted a 5% economic growth rate for this year, which it says is “in line with realistic conditions” and asserts that the long-term positive trend of China’s economy has not changed.
This outlook revision by Fitch follows a similar move by Moody’s in December, which downgraded its outlook on China’s credit rating from stable to negative. Moody’s cited risks related to “structurally and persistently lower medium-term economic growth” and ongoing troubles in its property sector as reasons for its reassessment.
The implications of Fitch’s downgrade are far-reaching, potentially affecting investor confidence and the cost of borrowing for China. It also raises questions about the effectiveness of China’s policy measures in addressing the structural issues that are impeding its economic growth. As the world’s second-largest economy, any significant shifts in China’s economic health are likely to have global repercussions, making this development a critical point of focus for international markets and policymakers.
