Fitch Downgrades China’s Outlook to ‘Negative’ with IDR Rating at A+

Fitch Ratings has revised the long-term foreign-currency issuer default rating (IDR) outlook of China from ‘stable’ to ‘negative’ while affirming the IDR at ‘A+’. The move reflects increasing risks to China’s public financial outlook amid the country’s economic transition away from growth reliant on property and rising government debt. On the other hand, China’s ‘A+’ rating is supported by its diversified economy, relative solid GDP growth prospects, essential role in global trade, robust external finances, and the yuan’s reserve currency status.

Fitch has pointed out an increasing fiscal stimulus as the government tries to counter economic headwinds, forecasting the general government deficit to rise to 7.1% of GDP in 2024 from 5.8% in 2023. With limited clarity on reform measures supporting medium-term fiscal consolidation and eroding revenue base, the debt ratio is projected to rise to 64.2% in 2025 and almost 70% by 2028.

Despite country’s financial challenges, Fitch foresees China’s GDP growth to remain around 4.5% through 2028, boosted by the large manufacturing and tech sectors, high investment and urbanisation. Certain uncertainties include the economic transition, demographics, falling productivity, sudden regulatory policy shifts and geopolitical risks.

The rating could be downgraded if there is a continued upward trajectory in general government debt/GDP from persistently high fiscal deficits or a rise in probability of contingent liabilities materialisation. It also could be upgraded if there is faster deficit reduction leading to stabilisation of the government debt ratio in the medium term or stronger medium-term growth prospects.