Rating agency Fitch has sent a sobering message about China’s financial stability, downgrading its outlook on the country’s sovereign credit rating to “negative.” The move stems from growing concerns over the nation’s public finances amidst economic uncertainties.
Escalating Fiscal Deficits
Fitch projects a significant surge in China’s general government deficit, rising from 5.8% of gross domestic product (GDP) in 2023 to 7.1% in 2024. This elevated deficit level, the highest since 2020, poses a looming threat to the country’s fiscal health.
Economic Slowdown
Compounding these fiscal worries is the anticipated slowdown in economic growth. Fitch predicts that China’s GDP will moderate to 4.5% in 2024, below the previously estimated 5.2% for 2023. This differs from the more optimistic forecasts from Citi and the International Monetary Fund.
Property Market Woes
China’s economic woes stem partly from the government’s efforts to transition from a property-led growth model to a more sustainable one. However, this shift has come at a price, as the property market has witnessed a severe downturn.
Shades of Hope
Despite the negative outlook, Fitch maintained China’s sovereign rating at “A+.” Moreover, recent economic data has shown signs of improvement, with factory output and retail sales exceeding forecasts in January-February.
Finance Ministry Expresses Disappointment
China’s finance ministry has expressed its regret over Fitch’s ratings decision. The ministry emphasized China’s strong economic resilience and highlighted measures being taken to address fiscal risks.
Moody’s Warning Echoes Concerns
Fitch’s move follows a similar warning issued by Moody’s in December 2023. The ratings agency cautioned about the rising costs of bailing out local governments and state firms while managing the property market crisis.
Conclusion
Fitch’s negative outlook on China’s sovereign credit rating is a sobering reminder of the challenges facing the world’s second-largest economy. The escalating fiscal deficits, economic slowdown, and ongoing property market woes raise concerns about the country’s long-term financial stability. While recent economic indicators offer some hope, it remains to be seen whether the government’s efforts to manage these challenges will prove effective in the long run.
