Fitch Ratings has downgraded China’s sovereign credit outlook to negative, citing concerns over the country’s public finances amidst the challenges of transitioning to new growth models. This comes after a similar move by Moody’s in December. Fitch’s revision reflects the difficult situation in China’s public finance, with slowing growth and mounting debt posing significant challenges. While it doesn’t indicate an immediate default risk, there are worries about credit polarization, particularly among local government financing vehicles.
Fitch predicts that China’s explicit central and local government debt will rise to 61.3% of GDP in 2024, a significant deterioration from 38.5% in 2019. They expect the general government deficit to reach 7.1% of GDP in 2024, the highest since 2020. Despite the negative outlook, Fitch affirmed China’s issuer default rating at ‘A+’. They project China’s economic growth to slow to 4.5% in 2024, while the International Monetary Fund predicts a slightly higher growth rate of 4.6% this year.
The rating downgrade reflects increasing risks to China’s public finance outlook as the country transitions to a more sustainable growth model. Fitch cited wide fiscal deficits, rising government debt, and challenges in managing high leverage as key factors. China’s finance ministry expressed regret over the downgrade and pledged measures to address risks associated with local government debt. Fitch’s warning emphasizes addressing fiscal challenges and reducing reliance on property development.
