Fitch Ratings revises outlook on China to negative, affirms at 'A+'

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, the rating agency said in a release.

Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective.

Fitch believes that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years that could keep debt on a steady upward trend.

Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage, it noted.

China's 'A+' rating is supported by its 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, Fitch observed.

These strengths are balanced against high economy-wide leverage, rising fiscal challenges and per capita income and governance scores below those of 'A' category peers.

Fiscal stimulus is being stepped up, as the government seeks to offset economic headwinds. Fitch forecasts the general government deficit to rise to 7.1 per cent of GDP this year ('A' median 3 per cent) from 5.8 per cent in 2023, on a Fitch-consolidated basis, which includes infrastructure and other official fiscal activity outside the headline budget.

The 2024 deficit will be the highest since the 8.6 per cent of GDP deficit in 2020.

Deflationary risks have emerged over the past year, amid weak domestic demand dynamics and temporary factors. Fitch does not forecast a prolonged period of deflation, with inflation of 0.7 per cent by end-2024 and 1.3 per cent by end-2025. Even so, risks are tilted to the downside and inflation could remain lower than its forecast, further weighing on the nominal GDP growth outlook.

The rating agency forecasts growth to remain around 4.5 per cent till 2028—higher than rating peers—supported by large manufacturing and tech sectors, high investment and urbanisation. Sustained investments in technologically advanced industries could boost productivity and enhance growth prospects.

Notable downside risks include uncertainties around the economic transition, demographics, declining productivity, abrupt regulatory policy shifts and geopolitical risks, especially related to trade and investment flows.

Global supply chain diversification is gathering pace, but Fitch believes this process will be gradual given China's advanced manufacturing ecosystem, high quality infrastructure and shift into higher value-added industries.

Fibre2Fashion News Desk (DS)