China says economy 'stable' as Fitch downgrades its fiscal outlook

BANGKOK — China's finance ministry condemned a report by Fitch Ratings that kept its sovereign debt at A+ but cut its outlook to negative, saying on Wednesday China's deficit remained at a moderate to reasonable level and risks were under control.

Fitch said the risks to China's public finances are rising as Beijing struggles to address mounting local and regional government debt and moves away from over-reliance on its troubled property sector to spur economic growth.

But Fitch said it retained China's A+ rating because of its „large and diversified economy,” its important role in world trade and its large foreign exchange reserves, while slower growth adds to the challenges of tackling over-borrowing.

The finance ministry said it was a „regret” that Fitch downgraded its sovereign debt and erred in its methods, saying it failed to consider „appropriately intensifying, improving the quality and efficiency” of Beijing's government spending.

„In the long run, maintaining modest deficits and making good use of precious debt funds will help expand domestic demand, support economic growth and ultimately maintain sound sovereign debt,” the ministry said.

„Overall, our country's local government debt resolution process is progressing in an orderly manner and risks are generally contained,” it said.

According to the Fitch report, China's general government deficit is forecast to rise to 7.1% of its GDP this year, from 5.8% in 2023. It said the average for countries with an “A” rating was 3.0%. China's average deficit to GDP ratio averaged 3.1% in 2015-2019, but rose to 8.6% in 2020 during the COVID-19 pandemic.

Tax relief measures and weak property investments, normally the main source of local tax revenue, have eroded the government's ability to collect tax revenue to cover higher spending, the report said.

Fitch forecast China's economy to expand at an annual rate of 4.5% this year, down from 5.2% last year, due to a slump in the property sector and sluggish consumer spending. That weakness.

Even as the government moves to curb excessive borrowing and support some property developers who are struggling to repay loans, analysts have warned that financial problems are now brewing in construction firms and other real estate-related industries.

Another ratings agency, Moody's, downgraded China's credit rating outlook in December, ING economists said in a report on Wednesday.

„In general we can observe that the credit situation deteriorated rapidly after the pandemic,” it said.

It said Fitch's move reflected a dilemma facing all policymakers.

„Failure to restore growth and confidence will weaken the GDP side of the debt-to-GDP equation, and will be equally detrimental to long-term debt sustainability,” it said. „However, it is important that financial expenditure from this stage is channeled towards productive areas of growth for the future.”