Fitch downgrade over debt risks hits raw nerve

A decision by a leading credit rating agency to downgrade China’s sovereign debt outlook failed to foresee the “positive role” of Beijing’s fiscal policy mix in promoting economic growth and stabilising the macro-leverage ratio, the Ministry of Finance said yesterday.

Fitch Ratings had earlier yesterday cited concerns over China’s property and public finance stress, as well as “eroded fiscal buffers” as the result of wide fiscal deficits and rising government debts, as the reasons behind cutting the rating from stable to negative.

“It is a pity to see Fitch’s downgrade,” the finance ministry said.

“The long-term positive trend of China’s economy has not changed, nor has the Chinese government’s ability and determination to maintain good sovereign credit.”

The ministry added that the local debt risk was “controllable”, and de-risking was progressing in an orderly manner.

China had also expressed disappointment in December after fellow international rating agency Moody’s Investors Service cut its outlook from stable to negative.

But the move by Fitch comes at a delicate time for the world’s second-largest economy, with China set to release its first-quarter data on Tuesday, which is expected to show a rebound in economic activities.

The finance ministry, which had held deep and extensive discussions with Fitch before the downgrade, said it had scientifically and rationally arranged the scale of the fiscal deficit, and kept the ratio at a reasonable level.

“Keeping the deficit ratio at a reasonable level, 3 per cent in 2024, is conducive to stabilising growth, controlling the government debt ratio and reserving policy space to deal with risks and challenges in the future,” the ministry said.

“In the long run, maintaining a moderate deficit and making good use of precious debt funds will help boost domestic demand, support growth, and in turn help maintain good sovereign credit.

“The Chinese government always takes into account multiple goals, like supporting economic development, preventing fiscal risks and achieving fiscal sustainability.”

Fitch did opt to maintain its A+ rating for China’s sovereign bonds, but the rating remained lower than the AA+ rating for US bonds.

The rating means China’s sovereign bonds are still considered to have an upper-medium investment grade.

Many investment banks have started to show optimism in China’s economy, with higher growth estimates, after economic activity data has shown some signs of stabilisation this year.

Citi lifted its annual growth forecast from 4.6 per cent to 5 per cent, while Nomura raised its projection from 4 per cent to 4.2 per cent.

Beijing’s stated target is for China’s economy to grow by “around 5 per cent” this year.

However, there are increasing calls for stronger fiscal stimulus to ensure this year’s growth target.

“Fitch believes that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years, which could keep debt on a steady upwards trend,” the rating agency said. “Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.”

Alicia Garcia-Herrero, chief economist for Asia-Pacific at French investment bank Natixis, said Fitch’s action reflected worries over intensifying financial problems.

“Fiscal deficit is a major worry, which is getting wider, and the number is just what central and local governments have on their balance sheet,” she said.

“We estimate local government financing vehicle (LGFV) debt, that is part of the fiscal deficit, may account for 30 per cent of gross domestic product. So who is going to cover LGFVs if anything happens?”