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Fitch Ratings Agency on Wednesday cut China’s sovereign credit outlook to negative, pointing to escalating risks surrounding the country’s public finances. This decision, which Beijing quickly labeled as “regrettable,” underscores the mounting concerns over China’s economic stability, especially amid a persistent property sector crisis threatening broader financial repercussions.
Economic headwinds and policy responses
Chinese authorities have been grappling with stimulating economic growth while navigating through various challenges, including the real estate sector’s downturn.Despite deploying targeted measures and issuing billions in sovereign bonds to fuel infrastructure and consumer spending, experts argue that significant additional efforts are required.
In a recent economic target setting, Beijing aimed for a 5 percent growth rate for 2024, acknowledging the difficulty of achieving this ambitious goal. Fitch’s outlook revision mirrors these concerns, highlighting the “increasing risks to China’s public finance outlook” amidst uncertain economic trajectories.
Why Fitch cut ratings
Fitch’s announcement reflects apprehensions about China’s fiscal health, emphasizing the growing reliance on fiscal policy to bolster growth, potentially leading to a continuous rise in debt levels. The projected slowdown in economic growth further complicates the management of the country’s substantial leverage, Fitch noted.
“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” the agency warned. And it said “fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend”.
Reacting to the downgrade, Beijing’s finance ministry expressed disappointment, critiquing Fitch’s methodology for not accurately capturing the effectiveness of China’s growth promotion efforts. The ministry stressed the importance of long-term fiscal strategies to support domestic demand and economic expansion, thereby maintaining favorable sovereign credit standing.
While adjusting the outlook to negative, Fitch affirmed China’s “A+” credit rating, acknowledging the country’s diversified economy, growth prospects, and significant role in global trade. However, it also pointed to challenges such as high leverage and fiscal pressures that temper these strengths.
Analyst insights and economic forecasts
Analysts interpret Fitch’s decision as a warning sign, emphasizing the delicate balance China must maintain in managing growth deceleration and increasing debt. Gary Ng from Natixis highlighted potential credit polarization among local government financing vehicles, stressing the importance of addressing weaker fiscal health at the provincial level.
Fitch anticipates China’s general government deficit to widen, marking a continuation of fiscal expansion since the COVID-19 pandemic’s peak impacts. This comes despite preliminary indications of economic stabilization, with recent data on factory output and retail sales exceeding expectations.
In response to the downgrade, China’s finance ministry vowed to address risks associated with local government debt, reiterating its dedication to economic growth and stability. The ministry’s statement reflects a commitment to leveraging fiscal measures responsibly to bolster the economy, despite the challenges highlighted by Fitch and other rating agencies.
(With inputs from agencies)
Economic headwinds and policy responses
Chinese authorities have been grappling with stimulating economic growth while navigating through various challenges, including the real estate sector’s downturn.Despite deploying targeted measures and issuing billions in sovereign bonds to fuel infrastructure and consumer spending, experts argue that significant additional efforts are required.
In a recent economic target setting, Beijing aimed for a 5 percent growth rate for 2024, acknowledging the difficulty of achieving this ambitious goal. Fitch’s outlook revision mirrors these concerns, highlighting the “increasing risks to China’s public finance outlook” amidst uncertain economic trajectories.
Why Fitch cut ratings
Fitch’s announcement reflects apprehensions about China’s fiscal health, emphasizing the growing reliance on fiscal policy to bolster growth, potentially leading to a continuous rise in debt levels. The projected slowdown in economic growth further complicates the management of the country’s substantial leverage, Fitch noted.
“Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective,” the agency warned. And it said “fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend”.
Reacting to the downgrade, Beijing’s finance ministry expressed disappointment, critiquing Fitch’s methodology for not accurately capturing the effectiveness of China’s growth promotion efforts. The ministry stressed the importance of long-term fiscal strategies to support domestic demand and economic expansion, thereby maintaining favorable sovereign credit standing.
While adjusting the outlook to negative, Fitch affirmed China’s “A+” credit rating, acknowledging the country’s diversified economy, growth prospects, and significant role in global trade. However, it also pointed to challenges such as high leverage and fiscal pressures that temper these strengths.
Analyst insights and economic forecasts
Analysts interpret Fitch’s decision as a warning sign, emphasizing the delicate balance China must maintain in managing growth deceleration and increasing debt. Gary Ng from Natixis highlighted potential credit polarization among local government financing vehicles, stressing the importance of addressing weaker fiscal health at the provincial level.
Fitch anticipates China’s general government deficit to widen, marking a continuation of fiscal expansion since the COVID-19 pandemic’s peak impacts. This comes despite preliminary indications of economic stabilization, with recent data on factory output and retail sales exceeding expectations.
In response to the downgrade, China’s finance ministry vowed to address risks associated with local government debt, reiterating its dedication to economic growth and stability. The ministry’s statement reflects a commitment to leveraging fiscal measures responsibly to bolster the economy, despite the challenges highlighted by Fitch and other rating agencies.
(With inputs from agencies)
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