Amid Economic Uncertainty, Fitch Issues Negative Outlook For China's Sovereign Credit Rating

Despite signaling a potential downgrade in the medium term, Fitch Ratings maintained China's issuer default rating (IDR) at 'A+'

Fitch Ratings has revised its outlook on China's sovereign credit rating to negative, citing mounting risks to public finances as the nation grapples with escalating uncertainty in its transition to new growth models. The rating agency’s projections indicate a significant uptick in the general government deficit, expected to soar to 7.1 per cent of the gross domestic product (GDP) in 2024, marking the highest level since 2020's 8.6 per cent. This rise comes as China navigates economic challenges exacerbated by stringent Covid containment measures.

Despite signaling a potential downgrade in the medium term, Fitch maintained China's issuer default rating (IDR) at 'A+'. Anticipating a slowdown, Fitch forecast China's economic growth to decline to 4.5 per cent in 2024, down from 5.2 per cent in the previous year. This forecast contrasts with upward revisions made by Citi and the International Monetary Fund.

January-February data showed better-than-expected performances in China's factory output, retail sales, exports, and consumer inflation, providing initial optimism toward Beijing's ambitious 5.0 per cent GDP growth target for 2024.

Fitch attributed its outlook revision to the mounting uncertainties surrounding China's economic trajectory, particularly amidst a shift away from property-centric growth models towards more sustainable alternatives, as highlighted by the government.

In response to Fitch's decision, China's finance ministry expressed regret over the ratings agency's move. This announcement follows Moody's cautionary warning in December, which highlighted concerns over China's escalating costs to stabilise local governments and state-owned enterprises amid a property crisis.

India forecast

Last month, Fitch announced a positive revision of its economic growth forecast for India, projecting a robust 7 per cent expansion for the upcoming fiscal year beginning April 1. This upward revision is attributed to India's resilient domestic demand and sustained confidence levels among businesses and consumers.

The rating agency decision was influenced by India's stronger-than-anticipated GDP growth of 8.4 per cent during the third quarter of the current fiscal year. The agency now foresees India's economy expanding by 7.8 per cent in the 2023-24 financial year, slightly surpassing the government's estimate of 7.6 per cent.