Fitch Ratings has cut its outlook for China, adding to the gloom surrounding the world’s second-largest economy.
Beijing is likely to pile up more debt as it tries to “transition away from property-reliant growth to what the government views as a more sustainable growth model,” the credit ratings agency said. It cut its outlook from “stable” to “negative,” but maintained its overall rating at “A+.”
The move comes after Moody’s Investor Services, another major credit-rating agency, also downgraded its outlook for China to “negative” in December.
Such downgrades tend to be a symptom of economic uncertainty, rather than a source of further misery. Fitch slashed its rating for the US in August, citing political deadlock surrounding the debt-ceiling crisis. However, the downgrade did not trigger a recession or stop stocks from posting one of their best 12 months for many years.
Still, the Fitch move is a reminder of some of the issues plaguing the Chinese economy.
Beijing has pledged to use fiscal policy to revive growth, which faltered last year. China’s economy expanded by 5.2{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} last year — slightly ahead of policymakers’ official target but far short of what many analysts and investors had expected.
Deflation has also become entrenched, with consumer prices falling at their sharpest pace in 14 years in February. Analysts have pointed to this as a sign of weakening demand and confidence.
All that doom and gloom is rooted in China’s ongoing property-market crisis. Real estate was a huge growth engine from the mid-1990s until 2020, but a government crackdown on borrowing since then has led to the collapse of big developers including Evergrande and Country Garden.
A weak property sector has eroded the wealth of many people, subduing consumer spending. As a result Fitch expects economic growth to fall to 4.5{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} for 2024.
The ratings agency said policymakers will probably have no choice but to borrow to address its economic woes. Fitch forecast that China’s deficit as a percentage of GDP will climb to 7.1{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} this year, up from 5.8{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} in 2023.
That’s considerably higher than the US deficit, which equated to 6.2{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} of GDP at the end of last year, per data from the St Louis Federal Reserve.
China’s finance ministry pushed back against Fitch’s revised outlook, saying that any interventions it makes will aid growth and help the country shore up its debt burdens.
Markets were little changed after Fitch’s move, with 10-year government bond yields holding steady at just under 2.3{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089}. The Chinese yuan traded flat against the US dollar, but the flagship CSI 300 index closed 0.8{e6a1e97ec1a15155ca0ed8c3e87721e561c99ed6e52274045963a20278fc2089} lower, bucking a global trend of stocks rising.
