Fitch Downgrades Outlook on China’s Credit Rating: Increasing Financial Risks
On Tuesday, February 21, 2023, Fitch Ratings announced that it had revised its outlook on China’s credit rating from stable to negative. While this change does not automatically result in a downgrade of China’s sovereign bonds rating, which currently stands at A+, it does increase the likelihood of such an event.
Risks to China’s Public Finance Outlook
The revision comes as China grapples with mounting financial risks in the context of economic challenges. Fitch noted that the increasing risks to China’s public finance outlook stem from uncertain economic prospects and the transition away from property-reliant growth toward a more sustainable growth model.
Rising Deficits
According to Fitch, the general government deficit is projected to reach 7.1% of gross domestic product (GDP) in 2024, up from 5.8% in the previous year. This year’s deficit is expected to be the highest since 2020 when pandemic-related controls began to significantly impact public coffers.
Regret and Disagreement
China’s Finance Ministry expressed regret over the revision and disagreed with Fitch’s assessment. In a statement, it acknowledged the extensive communication between its team and Fitch, but criticized the agency’s methodology for failing to effectively and prospectively reflect the positive role of fiscal policy in promoting economic growth.
Maintaining a Moderate Deficit
The ministry emphasized the importance of maintaining a moderate deficit and making good use of precious debt funds to 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.
Growth Targets
The ministry has targeted 5% economic growth for the year, which it deems “in line with realistic conditions.” It emphasized that the long-term positive trend of China’s economy has not changed, nor has the Chinese government’s ability and determination to maintain good sovereign credit.
Moody’s Downgrade in December 2022
In a surprising move back in December 2022, rival ratings agency Moody’s had downgraded its outlook on China’s credit rating from stable to negative. Its reasons for the revision included risks related to “structurally and persistently lower medium-term economic growth” and ongoing issues in China’s property sector.
Implications for Global Economy
As one of the world’s leading economies, a potential downgrade of China’s credit rating could have significant implications for global financial markets and the broader economy. Stay tuned for further updates on this developing story.
Conclusion
Fitch’s decision to revise its outlook on China’s credit rating from stable to negative signifies increasing financial risks for the country, as it faces economic challenges and transitions away from property-reliant growth. The Chinese government disagrees with Fitch’s assessment, emphasizing the role of fiscal policy in promoting economic growth and maintaining good sovereign credit.
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