ls it objective for Fitch to downgrade China's outlook?

On April 10th, Fitch Ratings has revised the outlook on China’s sovereign rating to negative from stable, and affirmed China’s sovereign rating at ‘A+’. The outlook to negative means the rating may be downgraded to ‘A’ in the future. Is this objective and comprehensive?

The reasons for Fitch Ratings negative rating downgrade are as follows.

Firstly, the fiscal deficit has widened. Fitch forecasts that China’s general government deficit will rise to 7.1% of GDP in 2024 from 5.8% in 2023, which is not only running roughly twice the 3.1% of GDP 2015-2019, but also above the 3% 'A' median.

Secondly, government debt is rising steadily. Fitch believes that China has decided to issue 1 trillion yuan of special treasury bonds, and the general government debt (explicit local and central government debt) to rise to 61.3% of GDP in 2024 from 56.1% in 2023. Debt as a share of revenue is forecast to be 234% in 2024, well above the 145% 'A' median.

Thirdly, some local government implicit liabilities (mainly from LGFVs) are facing significant pressures. These regions were permitted to issue special refinancing bonds to bring implicit debt directly onto their balance sheets, which potentially creates a gradual, but persistent, drain on fiscal resources.

Fourthly, there has been pressure on near-term growth. Persistent property sector weakness and subdued household consumption result in negative effects on the Chinese economy. Fitch forecasts GDP growth to moderate to 4.5% in 2024, from 5.2% in 2023.

UCCR’S OPINION

Is Fitch's downgrade of China's sovereign credit rating outlook objective and comprehensive? UCCR hold the following opinions:

Firstly, the rating standards are not be completely in conformity with China's national conditions.Fitch sovereign credit rating index system of methodology can’t reflect China fiscal policy to "moderately strengthen, improve quality and increase efficiency". Ignoring the positive role of policies in promoting economic growth and stabilizing the macro leverage ratio. Fitch's sovereign credit rating standards has defective. This situation warns China's rating industry and rating companies that China should accelerate its pace, improve the voice of the credit rating industry in the world, and cultivate Chinese rating agencies with international status and influence.

Secondly, China's economic transformation, with the new quality of productive forces to help the economic development of high-quality. Fitch believes that the downturn for the real estate industry is drag down the development of the national economy. Fitch ignores that China's economy has gradually reduced its excessive dependence on the real estate industry during the transition period. The president Xi Jinping put forward the ‘new quality of productive’ in September 2023 in Heilongjiang. He stress on the political Bureau of the CPC Central Committee for No.11 that we will accelerate the development of new quality productive forces and promote high-quality development. (January 31, 2024) China's economy is transitioning to technology-intensive industries. Integrating scientific and technological innovation resources, leading the development of strategic emerging and future industries, accelerating the formation of new quality productive forces, and developing new industries, new models and new driving forces are the future development trends. Fitch saw the negative impact of the real estate market adjustment, but Fitch did not pay attention to the rapid development of China's new economy, is this not objective and fair?

Thirdly, to correctly understand the current economic situation, the Chinese economy has strong resilience and potential. First of all, China has the advantage of ultra-large scale market, which provides internal impetus for economic development. The expansion of the middle-income group and the steady growth of people's income and consumption have provided strong support for the domestic demand market. At the same time, the consumption upgrade and diversification of consumer demand have further promoted the development of the market. Second, the industrial structure of the Chinese economy is being optimized and upgraded, and the industrial system has gradually developed into one of the largest in the world, with the most complex and complete industrial chain. The rapid development of high-tech industries and the rise of strategic emerging industries have further enhanced China's position in the global industrial chain. Moreover, China's foreign trade economy is developing well, its activity in global trade and the resilience of its foreign economy are increasing, and the actual amount of foreign capital used is at a historical high, which shows the confidence of international investors in the Chinese market. Finally, the Chinese government's sound performance in macroeconomic management provides a solid foundation for long-term economic development. The Chinese government has been committed to implementing proactive fiscal policies and prudent monetary policies to control inflation and maintain economic stability, which has provided a strong guarantee for the resilience of the Chinese economy.

Fourthly, the Chinese government has a good ability to deal with debt risks. The Chinese government is committed to taking into account the multiple objectives of supporting economic development, preventing financial risks and achieving fiscal sustainability. In light of the changing situation, the Chinese government has taken into account the needs and possibilities, scientifically arranged the scale of the deficit, keeping the deficit-to-GDP ratio at a reasonable level. The Chinese government has also taken a variety of measures to defuse the risks of local government debt and strictly prevent new debt risks. At the same time, the government also stressed the establishment of a government debt management mechanism compatible with high-quality development, and improved the full-caliber local debt monitoring and supervision system to ensure that debt risks are effectively controlled. The Chinese government has also focused on optimizing the debt structure, reducing the financing costs of local government debt through debt replacement and other means, and alleviating the pressure of debt repayment.

SUMMARY

The fact of Fitch's downgrade of China's sovereign credit rating outlook is worth to think about. We need to look at the rating results objectively and rationally analyze the challenges and risks to the Chinese economy. We should also see the potential, resilience and opportunities of the Chinese economy. In the future, with the continuous development of China's economy and the deepening of opening-up, its role and status in the global economy will be further enhanced, and in the long run, China's economy will remain stable and have strong momentum.

Author: UCCR Rating Research Center

Reviewer: Wensheng Dai

Producer: Yanhua Luo

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创建时间：2024-04-15 09:29

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