Fitch cuts China's ratings outlook on growth risks
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[April 10, 2024] BEIJING
(Reuters) -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% of gross domestic product (GDP) in 2024 from 56.1% in 2023 - a
clear deterioration from 38.5% in 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% of GDP in 2024 from 5.8%
in 2023, the highest since 8.6% in 2020, when Beijing's strict COVID
curbs weighed heavily on the economy.
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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.
S&P, the other major global rating agency, also rates China A+, the
equivalent of Moody's current A1 rating.
Fitch forecast China's economic growth would slow to 4.5% in 2024 from
5.2% last year, while the International Monetary Fund expects China's
GDP to grow 4.6% this year.
The ratings warning comes despite tentative signs China's economy is
finding its footing.
Factory output and retail sales topped forecasts in January-February,
following better-than-expected exports and consumer inflation
indicators.
Those data points have shored up Beijing's hopes that it can hit what
analysts have described as an ambitious GDP growth target of around 5.0%
for 2024.
"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," Fitch said.
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People walk past an office and shopping complex in Beijing, China
April 10, 2024. REUTERS/Tingshu Wang
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"Wide fiscal deficits and rising government debt in recent years
have eroded fiscal buffers from a ratings perspective," it said.
"Contingent liability risks may also be rising, as lower nominal
growth exacerbates challenges to managing high economy-wide
leverage."
China plans to run a budget deficit of 3% of economic output, down
from a revised 3.8% last year. Crucially, it plans to issue 1
trillion yuan ($138.30 billion) in special ultra-long term treasury
bonds, which are not included in the budget.
The special bond issuance quota for local governments was set at 3.9
trillion yuan, versus 3.8 trillion yuan in 2023.
China's overall debt-to-GDP ratio climbed to a new record of 287.8%
in 2023, 13.5 percentage points higher than a year earlier,
according to a report by the National Institution for Finance and
Development (FIND) in January.
"FUNDAMENTAL CONCERN"
The planned treasury bond issuance signals Beijing's willingness to
shoulder a higher share of the burden of meeting growth targets, as
local governments struggle to cope with slower fiscal revenues and
depressed land sales.
"The Fitch revision has reflected the fundamental concern over
China’s fiscal health and its ability to drive growth in the long
term," said Dan Wang, chief economist of Hang Seng Bank China.
"With lagging private investment, state-backed funding has become
even more important in driving growth, either in terms of
infrastructure spending or in local government guidance funds for
high tech industries."
China's finance ministry said following the announcement it
regretted Fitch's ratings decision, vowing to take steps to prevent
and resolve risks from local government debt.
"In the long run, maintaining a moderate deficit size and making
good use of valuable debt funds is beneficial for expanding domestic
demand, supporting economic growth, and ultimately maintaining good
sovereign credit," the ministry said in a statement.
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Moody's in December slapped a downgrade warning on China's credit
rating, citing costs to bail out local governments and state firms
and control its property crisis.
($1 = 7.2305 Chinese yuan)
(Reporting by Joe Cash, Kevin Yao, Ellen Zhang in Beijing and
Akanksha Khushi in Bengaluru; Editing by Kim Coghill, Sam Holmes and
Sonali Paul)
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