Fitch cuts China credit outlook to negative on ‘uncertain economic prospects’

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Fitch Ratings cut its outlook on China’s long-term credit rating to negative on Wednesday, citing uncertain prospects for the economy as the country transitions from its property-led growth model.

The move by the rating agency, which maintained the country’s A plus credit rating, follows a similar outlook downgrade from rival Moody’s Ratings in December.

“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 agency said.

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

China’s finance ministry hit back at the downgrade. Fitch’s rating system “failed to effectively anticipate the positive role of fiscal policies in promoting economic growth”, the ministry said.

Beijing has been struggling to boost growth in the post-pandemic era. It is still dealing with multiple economic challenges such as a prolonged property crisis, high local government debt and falling direct foreign investment.

In recent months, Beijing has redirected resources to the manufacturing and high-tech sectors. It has also sought to curb the spending of indebted local governments traditionally reliant on land sales for revenues.

China has set an economic growth target of 5 per cent, the same as last year’s figure and the lowest in decades, but analysts believe it will be difficult to achieve without an increase in domestic consumption and revival of confidence.

Fitch forecast that China’s gross domestic product growth would slow to 4.5 per cent in 2024, citing persistent property sector weakness and subdued household consumption.

A growth target of 5 per cent is “in line with expectations, reality and the need for developments”, the ministry said. The economy’s “long-term positive fundamentals have not changed, and China’s ability and determination to maintain good sovereign credit have also not changed”.

Fitch also forecast that general government debt — which covers local and central government borrowing — would rise to 61.3 per cent of GDP in 2024, up from 56.1 per cent in 2023, primarily due to fiscal support to counter economic pressures.

The finance ministry said China’s debt was under control, while hidden debt — local government’s off-balance sheet liabilities — was also declining.

President Xi Jinping has launched a charm offensive to revive investor confidence in China, engaging in high-level meetings with foreign executives.

The outlook downgrade follows a week-long trip to China by US Treasury secretary Janet Yellen, who voiced concern about the potential impact of excess Chinese capacity on global trade.