China's economic strategy raises concerns of higher deficits & debt

21 Dec '23

2 min read

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Insights

China's focus on development next year may boost growth but could lead to higher fiscal deficits and government debt, per Fitch Ratings.
A greater reliance on fiscal policy is expected, with increased government support potentially widening the 2024 deficit.
Despite China's 'A+' rating, concerns over public finances and slowing GDP growth loom.

Following the Chinese government’s announcement that development will be a priority next year, the country’s growth aspects have turned brighter, according to Fitch Ratings. However, the agency warns that this could lead to higher fiscal deficits and government debt, along with increased contingent liability risks.

The recent Central Economic Work Conference has reinforced the expectation that fiscal policy will play a significant role in China's economic strategy for the coming year. Fitch anticipates more central government support, potentially leading to a wider national fiscal deficit in 2024 than currently projected. Fiscal measures are expected to focus on investment support, with a possibility of broader tax reform. In contrast, monetary policy is predicted to have a lesser role in supporting growth.

Despite affirming China’s ‘A+’/Stable rating in August 2023, Fitch cautions that further weakening of China's public finances could pressure its rating downward. The rating agency projects a slowdown in growth to 4.6 per cent in 2024, from an estimated 5.3 per cent in 2023, reflecting subdued economic momentum and ongoing stress in the property sector. Risks to the sovereign balance sheet from contingent liabilities are seen as elevated due to slowing nominal GDP growth.

Fitch expects local and regional government expenditures to grow in 2024, supported by stabilising revenue inflows and growing debt. The government's plan to reduce structural tax and fee levels, particularly favouring high-tech and innovative manufacturing sectors, is not expected to significantly impact total revenue.

Authorities plan to broaden the scope of project types eligible for special-purpose bonds (SPBs), which could increase local governments’ credit exposures. Local-government financing vehicles (LGFVs) may also increase their industrial investment activities, potentially raising public-sector liabilities.

Economically stronger provinces are expected to contribute more to growth, potentially allowing the central government to redirect fiscal revenue to support weaker regions. While a greater focus on preventing systemic risks might lead to stricter monitoring of LGFVs, Fitch warns of potential unintended consequences, such as abrupt liquidity tightening leading to isolated LGFV defaults.

Fibre2Fashion News Desk (DP)

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