Fitch Ratings recently adjusted China’s sovereign credit rating outlook to negative due to mounting risks in its public finance and economic prospects. Despite maintaining an ‘A+’ rating, concerns linger over China’s fiscal health, exacerbated by high deficits, escalating government debt, and the growing necessity for fiscal policy to drive economic growth.
Economic Overview:
China, possessing a large and diverse economy with solid GDP growth potential, remains pivotal in global trade. However, challenges such as high macroeconomic leverage, fiscal pressures, and governance disparities persist. Fitch anticipates China’s deficit reduction to be gradual, intertwined with economic goals, though precise medium-term fiscal reforms remain uncertain.
Local Government Debt and Economic Impact:
Regional governments, impacted by a property market slowdown, face refinancing hurdles, particularly Local Government Financing Vehicles (LGFVs). Recent measures allowed highly indebted regions to issue substantial refinancing bonds to consolidate LGFV debt onto their books, with further issuances expected in 2024. Banks are urged to restructure LGFV debt, supported by local asset management companies.
Debt Outlook and Projections:
Fitch predicts an ongoing rise in China’s general government debt-to-GDP ratio, reaching 64.2% by 2025 and nearing 70% by 2028. These figures represent an upward trend from previous estimates, underlining the fiscal challenges ahead.
Chinese Government Response:
China’s Ministry of Finance challenges Fitch’s assessment, highlighting the positive impact of fiscal policy on economic growth and macro leverage stability. They assert that China’s GDP growth and strategic initiatives align with development objectives, reflecting confidence in sustained high-quality economic progress.
Despite China’s economic resilience and global significance, concerns over fiscal management and debt sustainability have prompted Fitch to reassess its credit outlook. The Chinese government remains steadfast in its commitment to economic stability and growth, aiming to address fiscal challenges while maintaining its sovereign credit strength. However, the evolving economic landscape underscores the need for proactive fiscal measures and clearer policy reforms to mitigate future risks.