Fitch revises China's debt outlook to negative amid rising deficits
Fitch Ratings has downgraded China's long-term foreign debt outlook to negative. Although the rating remains A+, the agency highlights that by 2024, the public finance sector deficit is expected to increase to 7.1 percent. This would mark the highest level since the pandemic year of 2020.
China is grappling with diminished market confidence. Fitch changed the country's outlook from "stable" to "negative". The downgrade in the rating outlook reflects growing challenges to the stability of China's public finances.
Fitch downgrades China's rating outlook to "negative"
The country faces increasing economic uncertainty as it shifts from an investment-driven growth model towards sustainable development. In recent years, high fiscal deficits and a surge in public debt have eroded budgetary reserves.
Fitch believes fiscal policy will be critical in bolstering economic growth shortly. However, this could result in further increases in debt levels. The challenges associated with contingent risks could also heighten as lower nominal growth worsens the challenges of managing high financial leverage throughout the economy.
Analysts also underscore China's strengths, which support maintaining the A+ rating. These include a vast and diverse economic base, comparatively strong GDP growth prospects, a pivotal role in global commodity trade, a stable external position, and the yuan's status as a reserve currency. However, these positives are countered by high debt levels, escalating fiscal issues, and per capita income and governance quality below that of other A-category countries.
China faces a growing deficit
The Chinese economy is confronting an increasing deficit. Fitch forecasts that in 2024, the public finance sector deficit will rise to 7.1 percent of GDP from 5.8 percent in 2023. This will be the highest level since 2020 when it stood at 8.6 percent of GDP. Since 2020, deficits have remained substantially higher, typically twice as much as between 2015 and 2019.
Concurrently, public debt is escalating rapidly. According to Fitch's forecasts, the public finance sector's debt-to-GDP ratio will increase to 61.3 percent in 2024, up from 56.1 percent in 2023. This indicates a significant deterioration from the 38.5 percent level in 2019. The debt trajectory is now steeper than anticipated - the agency projects the debt at 64.2 percent of GDP by 2025 and approaching 70 percent by 2028. Earlier estimates had suggested the ratio would remain slightly below 60 percent by 2028.
Chinese regions face challenges
Concerns are also growing over the financial health of China's local and regional governments. Falling revenues from the real estate market and high indebtedness are pressing issues for local governments. Some Local Government Financing Vehicles (LGFVs) are under debt refinancing stress. Although initiatives are underway to support these entities, the risk of contingent liabilities becoming actual debts is expected to linger.
According to Fitch, the silver lining is that financial markets and rating agencies might grow more accommodating of China's gradually increasing public debt relative to GDP in the forthcoming years. This is attributed to the expected relatively quick economic growth, which could ameliorate China's disparity with developed nations. Nevertheless, revising the rating outlook is a distinct indicator of rising risks to China's financial and fiscal stability.
Reuters reports that the market responded with composure to Fitch's decision. The Asian market kicked off Wednesday with gains, and European indices also recorded modest gains.
