Fitch put China’s economic outlook to "negative" from "stable". Beijing, aware of its challenges, is now refocusing the whole economy.
Fitch, one of the world’s major rating agencies, cut China’s sovereign credit rating to “negative”, citing financial and debt concerns. Moody’s issued a similar downgrade in December, with both agencies slashing Chinese property developers’ ratings.
China is the world’s second-largest economy but faces a swath of macroeconomic issues, including rampant deflation, a bursting real estate market, and weak post-COVID recovery.
Lowering the outlook means a downgrade in the medium term is possible. However, Fitch left China’s issuer default rating at A+, its third-highest level. "Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt," said senior economist at Natixis Asia-Pacific Gary Ng.
He added that, while the possibility of China’s default is remote, the downgrade could increase polarization in local financing vehicles. Some regions could receive less financial support after the downgrade, even though China’s local governments “see weaker fiscal health”.
The Chinese Communist Party (CCP) intends to artificially stimulate the economy. That, however, entails adding to the already significant debt-to-GDP ratio, which reached 288% in 2023.
Fitch expects China to increase its budget deficit by 7.1% of GDP in 2024, up from 5.8% last year. The agency also expects a 4.5% GDP growth this year, not fulfilling the 5% government goal.
Looking ahead
China’s post-COVID economic growth disappointed most economists and outside observers. Moreover, the real estate crisis risks hampering China’s meteoric growth.
But Beijing, although aware of the current difficulties, seems ready to face them. At the “Two Sessions” annual conference, China’s economic officials laid out their growth plans for this and future years.
First, insolvent real estate developers should go bankrupt, per direct party line. The CCP’s motto since 2018 has been “Houses are for living, not for speculation”.
But the real estate market amounts to roughly 25% of China’s GDP. To replace it, Beijing needs a strong substitute.
Western analysts believe China should now refocus its economy on services. However, Commerce Ministry Wang Wentao outlined new lines of production he believes should give China a new manufacturing edge.
These “new three” products are lithium-ion batteries, electric vehicles, and solar panels. China is already the lead producer of all three products but will expand manufacturing to never-seen-before levels.
It’s unclear whether China’s new push will succeed. Demand for electric vehicles is slowing down, and the European and American car industries will try to stop China as much as possible.
But it wouldn’t be the first time China snatched an industry out of the West’s hands. Even though Fitch downgraded China’s outlook, alarm bells are sounding across Western power centers.
