Fitch Ratings downgrades China outlook to negative as economic concerns rise

By Barbara Kollmeyer

China's long-term foreign debt rating was cut to negative from stable at Fitch Ratings on Wednesday, with the agency citing concerns over widening deficits and economic worries.

"The outlook revision reflects increasing risks to China's public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model," said lead analyst Jeremy Zook, in a note.

"Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective," said the analysts, who said fiscal policy will likely "play an important role in supporting growth in the coming years which could keep debt on a steady upward trend."

Fitch affirmed the issuer default rating for China at A+, which it said was supported by a "large and diversified economy, still solid gross domestic product (GDP) growth prospects relative to peers, integral role in global goods trade, robust external finances, and reserve currency status of the yuan."

The analysts forecast that China's general government debt - local and central government debt - will rise to 61.3% of GDP from 56.1% in 2023, a "clear deterioration" from 38.5% in 2019. They expect the debt ratio to reach 64.2% in 2025 and nearly 70% by 2028.

"The degree to which fiscal support reignites underlying GDP growth is a key uncertainty for our debt path. Risks from higher government debt are mitigated by a high domestic savings rate, which supports debt affordability and financing flexibility," said the analysts.

They forecast China GDP will moderate to 4.5% in 2024 from 5.2% in 2023, owing to weakness in the property sector and consumer spending, due to "negative wealth effects from the property correction" and income growth that has grown sluggish.

Investors have been reluctant to put money in China in recent years, amid a failed post-COVID bounce, that weak consumer spending and real estate issues.

Ray Dalio, founder of hedge fund Bridgewater Associates, recently defended his investments in the country, saying he believes China's policymakers are committed to delivering quantitative easing and debt restructuring.

The Hang Seng HK:HS I is up 0.07% so far in 2024, with China's CSI 300 index XX:000300 up 1.7%. Those indexes were up 2% and down 0.7%, respectively, on Wednesday.

-Barbara Kollmeyer

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04-10-24 0214ET

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