China’s Ministry of Finance expresses regret over Fitch Rating’s recent downgrade decision

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10th April 2024 – (Beijing) The Chinese Ministry of Finance has responded to Fitch Ratings’ recent downgrade of China’s credit outlook, expressing regret and highlighting the agency’s failure to acknowledge the positive impact of fiscal policies on economic growth. Fitch Ratings, a US-based credit rating agency, downgraded China’s long-term outlook to negative while maintaining its A+ credit rating.

Fitch cited China’s shift away from a growth model reliant on the property sector as a cause for increased uncertainty. However, the Ministry of Finance argues that Fitch’s rating system failed to anticipate the effectiveness of fiscal policies in promoting economic growth.

According to the ministry, China’s fiscal policy is expected to play a crucial role in supporting growth in the coming years, which could lead to a steady increase in debt. The ministry also emphasized the ongoing efforts to manage local government debt in an orderly manner, stating that overall risks are manageable.

The ministry further stated that a 3% deficit ratio is reasonably appropriate. They believe that maintaining an appropriate deficit size and utilizing debt funds effectively will support domestic demand, economic growth, and ensure a sound sovereign credit rating. The deficit ratio for 2024 is set at 3%, which is considered moderate and reasonable, allowing policy flexibility to address potential future risks and challenges.

Addressing concerns about fiscal sustainability, including fiscal deficits and local government debt, the ministry highlighted the implementation of debt restructuring plans and the reduction of hidden debts. They expressed confidence in the progress made, as local government debt risks have been mitigated overall, and the repayment of legally binding local government debts has been effectively guaranteed.

Looking ahead, the Ministry of Finance, in collaboration with relevant parties, will strengthen the management of local government debt, promote effective debt restructuring plans, and establish long-term mechanisms to prevent and address hidden debt risks. These measures align with the goal of achieving high-quality development while resolving local government debt concerns.

Fitch Ratings’ revision of China’s Long-Term Foreign-Currency Issuer Default Rating (IDR) Outlook reflects the increasing risks faced by China’s public finance outlook as the country transitions away from property-dependent growth. While China’s large and diversified economy, solid GDP growth prospects, and robust external finances contribute to its A+ rating, concerns remain regarding high economy-wide leverage and rising fiscal challenges. The path to fiscal consolidation is uncertain, and the erosion of the revenue base presents additional challenges.

China’s fiscal stimulus has been intensified to counter economic headwinds, leading to a forecasted rise in the general government deficit in 2024. General government debt is projected to increase, and contingent liability risks may rise due to lower nominal growth. The slowdown in the property sector and refinancing pressures faced by Local Government Financing Vehicles (LGFVs) have impacted local and regional governments, prompting measures such as refinancing bonds and debt restructurings.

While China’s GDP growth is expected to moderate in the coming years, fiscal stimulus measures and external demand are anticipated to partially offset the challenges. Deflationary risks and uncertainties related to the economic transition, demographics, and regulatory policies pose notable downside risks. However, China’s central role in global trade and manufacturing, along with its strong external finances, provide a cushion against potential shocks.

China’s Ministry of Finance remains committed to addressing fiscal challenges, managing local government debt, and pursuing high-quality development. Through effective fiscal policies and ongoing efforts, they aim to promote economic growth, enhance fiscal sustainability, and safeguard the country’s sovereign credit rating.