China’s Finance Ministry has responded to a report by Fitch Ratings that downgraded its outlook to negative while maintaining its sovereign debt rating at A+. The ministry emphasized that China’s deficit is at a moderate and reasonable level, with risks under control. Fitch cited rising risks to China’s public finances as it works to resolve mounting government debts and lessen reliance on the property industry for economic growth. Despite slower growth adding to borrowing challenges, Fitch kept China’s rating due to its large economy, global trade role, and significant foreign reserves. The Finance Ministry criticized Fitch for not considering China’s efforts to improve government spending efficiency and maintain a manageable deficit.
The Finance Ministry highlighted the importance of maintaining a moderate deficit and efficiently using debt funds to stimulate domestic demand, support economic growth, and sustain good sovereign credit. It noted that China’s local government debt resolution work is progressing smoothly and risks are manageable. Fitch’s report projected China’s general government deficit to rise to 7.1% of GDP this year, up from 5.8% in 2023, above the median for countries with an “A” rating. Tax relief measures and a decline in property investments have impacted the government’s revenue collection capacity, adding pressure to higher spending.
Fitch predicted a 4.5% annual economic growth rate for China this year, down from 5.2% in 2023, attributed to property sector challenges and subdued consumer spending. However, higher government spending is expected to offset some of the weaknesses. The government has provided support to struggling property developers following a crackdown on excessive borrowing, but financial troubles are spreading to other industries linked to real estate. Moody’s downgraded China’s credit rating outlook in December, signaling deteriorating debt conditions since the pandemic. Analysts point out the dilemma policymakers face in balancing growth restoration with maintaining debt sustainability through productive fiscal spending.
Fitch’s downgrade reflects concerns about China’s escalating debt situation post-pandemic and the potential impact on long-term debt sustainability if growth and confidence are not restored. The report urges directing fiscal spending towards areas that promote future growth to address the challenges posed by the current economic climate. Moody’s downgrade of China’s credit rating outlook further emphasizes the need for proactive measures to address the rapidly deteriorating debt situation. ING economists echoed these sentiments, highlighting the urgency of prioritizing economic stability and debt sustainability in China’s current fiscal and economic landscape. The outlook remains uncertain as China navigates through ongoing challenges in managing its deficit and optimizing debt utilization for sustainable growth.
