- Beijing will accumulate debts as it tries to revive the Chinese economy, according to Fitch.
- The rating agency lowered its outlook for China to negative on Wednesday.
- Policymakers also face faltering growth and a lingering crisis in the housing market.
Fitch Ratings has lowered its outlook for China, adding to the gloom surrounding the world’s second-largest economy.
Beijing will likely accumulate more debt as it attempts to “shift from real estate-led growth to what the government sees as a more sustainable growth model,” the credit rating agency said. It lowered its outlook from “stable” to “negative,” but maintained its overall rating at “A+.”
The move comes after Moody’s Investor Services, another major credit rating agency, also lowered its outlook for China to “negative” in December.
Such downgrades are generally a symptom of economic uncertainty rather than a source of additional misery. Fitch downgraded the United States in August, citing political impasse surrounding the debt ceiling crisis. However, the downgrade didn’t trigger a recession or stop stocks from posting one of their best 12 months in many years.
Still, Fitch’s decision serves as a reminder of some of the problems plaguing China’s economy.
Beijing has pledged to use fiscal policy to revive growth, which faltered last year. China’s economy grew 5.2% last year, slightly above policymakers’ official target but well below what many analysts and investors expected.
Deflation has also taken hold, with consumer prices falling in February at their steepest pace in 14 years. Analysts see this as a sign of weakening demand and confidence.
All this pessimism has its origins in the current crisis in the Chinese real estate market. Real estate was a huge growth engine from the mid-1990s until 2020, but since then a government crackdown on lending has led to the collapse of major developers including Evergrande and Country Garden.
Weakness in the real estate sector has eroded the wealth of many people, dampening consumer spending. As a result, Fitch expects economic growth to fall to 4.5% for 2024.
The ratings agency said policymakers will likely have no choice but to borrow to deal with the country’s economic woes. Fitch forecasts China’s deficit as a percentage of GDP to reach 7.1% this year, up from 5.8% in 2023.
That’s considerably higher than the U.S. deficit, which was equivalent to 6.2% of GDP at the end of last year, according to data from the St. Louis Federal Reserve.
China’s Finance Ministry opposed Fitch’s revised outlook, saying any intervention it made would promote growth and help the country consolidate its debt burden.
Markets were little changed after Fitch’s decision, with yields on 10-year government bonds holding steady at just under 2.3%. The Chinese yuan remained stable against the US dollar, but the flagship CSI 300 index closed down 0.8%, bucking a global upward trend in stocks.
businessinsider
