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Fitch Ratings has cut its outlook on China’s long-term foreign debt to negative from stable, reflecting the growing risks to the country’s public finances, but affirmed its A+ rating.
The rating agency pointed to China’s uncertain economic prospects as it transitions away from property-reliant growth to what the government views as a more sustainable growth model.
China’s wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings’ perspective. “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.”
Fitch expects government debt to reach 61.3% of GDP in 2024 from 56.1% in 2023, due to sustained fiscal support to counter economic pressures. Government deficit will likely rise to 7.1% of GDP in 2024 – the highest since 2020 – from 5.8% in 2023. Deficit reduction is expected to be gradual, with little clarity on reform measures to support medium-term fiscal consolidation.
Even so, China’s A+ rating is supported by “its large and diversified economy, still solid GDP growth prospects relative to peers, integral role in global trade, robust external finances, and reserve currency status of the yuan.”
Fitch sees GDP growth moderating to 4.5% in 2024, from 5.2% in 2023, due to persistent real estate weakness and muted household consumption. Growth is expected to remain ~4.5% through 2028.
While the U.S. is working towards supply chain diversification amid rising trade tensions, Fitch expects this will be gradual given China’s advanced manufacturing ecosystem and shift into higher value-added industries.
Fitch’s outlook update follows Moody’s revising China’s credit outlook to negative last December, due to rising government costs to support cash-strapped regional and local governments and state firms.
