(Reuters) -Ratings agency Fitch revised its outlook on China’s sovereign credit rating to negative on Wednesday, citing risks to public finances as the government faces increasing uncertainties in its shift to new economic growth models.
China’s finance ministry said it regretted seeing the ratings revision and said Fitch’s rating system fails to effectively reflect the positive effect of China’s fiscal policy.
QUOTES:
GARY NG, ASIA-PACIFIC SENIOR ECONOMIST, NATIXIS, HONG KONG
“Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt. This does not mean that China will default any time soon, but it is possible to see credit polarization in some LGFVs, especially as provincial governments see weaker fiscal health. There are still means of liquidity injection and state resources reallocation to mitigate the pressure if needed.”
ZHAOPENG XING, SENIOR CHINA STRATEGIST, ANZ, SHANGHAI
“The downgrade decision comes before the April Politburo meeting and the release of the first-quarter economic data. However, the impact on macro policy is expected to be small but lasting.
“And as many companies have shifted to yuan financing, it will have little impact on financial markets.”
DAN WANG, CHIEF ECONOMIST, HANG SENG BANK (CHINA), SHANGHAI
“With lagging private investment, state-backed funding has become even more important in driving growth, either in terms of infrastructure spending or in local government guidance funds for high tech industries.
“Yet Chinese government’s fiscal capacity is compromised by slower growth and depressed land sales. The Fitch revision has reflected the fundamental concern over China’s fiscal health and its ability to drive growth in the long term.”
BEN BENNETT, HEAD OF INVESTMENT STRATEGY, LGIM, HONG KONG
“China faces some significant structural headwinds associated with inefficient investment, particularly in the property sector. But policymakers are trying to address this now. So while China’s recent economic performance has been disappointing, it could be on a firmer footing looking ahead.”
CHI LO, SENIOR MARKET STRATEGIST, BNP PARIBAS ASSET MANAGEMENT, HONG KONG
“Fitch’s move followed a similar move by Moody’s in December 2023. These downgrades reflected mostly the current cyclical situation in China, they are not forward looking. This means that, as and when China’s economy improves, they will change their rating outlook to positive.
“China has a relatively closed capital account, a very small foreign debt and a strong structural reform and debt reduction resolve. So the rise in its fiscal deficit and the high debt load are manageable risks and not a dire situation as many observers see it.”
MA HONG, SENIOR ANALYST, GDDCE RESEARCH INSTITUTION, SHANGHAI
“Personally, I think this is a summary of China’s economic performance over the past two to three years by the international rating agencies, favouring lagging rather than leading indicators.
“Certainly, it shows that China’s central government finances have gradually gained strength over the past period of time, and central government debt has increased, aiming to cope with and activate economic growth, and to help properly deal with the problem of local government debt.
“The more immediate impact of adjusting the outlook rating could have an impact on the ability of the Chinese government and enterprises to raise US dollar debt financing.
“Overall, Fitch’s concerns about central government debt are not necessary. Although central government finances continue to expand, the central government’s leverage ratio remains low, and there are still many tools at its disposal, with ample room for manoeuvre. The main domestic risks are still centred on housing and local government debt, which is a drag on the overall credit market and the economy.”
FRASER HOWIE, AUTHOR OF SEVERAL BOOKS ON CHINA’S FINANCIAL SYSTEM, SINGAPORE
“While this move will no doubt draw criticism from China, the reality is that the Chinese economy is mired in debt. Local governments have had to fund themselves via debt for years. The central government is not directly responsible for paying off the debts but defaults will lead to social unrest which will certainly unsettle the Party.”
NIE WEN, ECONOMIST, HWABAO TRUST, SHANGHAI
“I expect a difficult time for local governments’ finances this year. New home sales data released so far are not ideal.
“Under such circumstances, the capital chains of the property sector will still be tight so the slump in local governments’ land sales revenue may continue. This year, the central government expects eastern regions to add leverage and drive up investment while the 12 debt-laden regions should control their leverage. If the property sector could stabilise, I believe the economy would expand, but challenges remain big this year.”
(Reporting by Reuters reporters in Hong Kong, Shanghai, Beijing and SydneyEditing by Sam Holmes and Kim Coghill)
