Fitch downgrades China's credit outlook due to economic concerns

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A real estate project under construction in Huai'an city, China's Jiangsu province, pictured on April 8, 2024

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Fitch on Tuesday downgraded its outlook for China's credit rating, citing increasing risks to its finances as the country faces economic challenges.

Lowering the outlook from stable to negative does not automatically mean a downgrade of China's credit rating by the rating agency, but it does increase the odds.

Fitch has left its rating on Chinese government bonds at A+.

The revision “reflects increasing risks to China's public finance outlook as the country grapples with a more uncertain economic outlook and moves from real estate-led growth to what the government believes is a more sustainable growth model,” it said in a statement.

Fitch assumes that the general government deficit will rise to 7.1% of gross domestic product in 2024 from 5.8% in the previous year. This year's deficit is expected to be the highest since 2020, when pandemic-related controls began to weigh heavily on public coffers.

The Chinese Ministry of Finance has expressed “regret” over the revision.

“We had extensive communication with the Fitch Ratings team in the initial stages and the report partly reflected China's views,” it said in a statement on Wednesday.

It added that the agency's methodology “does not effectively and prospectively reflect the positive role of fiscal policy in promoting economic growth.”

“In the long term, maintaining a moderate deficit and judicious use of valuable debt resources will help increase domestic demand, support economic growth and ultimately help maintain good government credit.” it said.

The fiscal deficit ratio for 2024 is set at 3%, according to the statement, and is described as “moderate overall” and “conducive to stable economic growth.”

The ministry has targeted economic growth of 5% for this year, which is “in line with realistic conditions”.

“The long-term positive trend of China's economy has not changed, nor has the Chinese government's ability and determination to maintain good sovereign creditworthiness.” it said.

In December, rival ratings agency Moody's downgraded its outlook for China's credit rating to negative from stable, citing risks related to “structurally and persistently lower medium-term economic growth” and ongoing problems in the real estate sector.