Li_DanLi_Dan ・ Apr. 11, 2024
China Highlights Ability to Maintain Sound Sovereign Credit after Fitch Cuts Ratings Outlook
Fitch has failed to effectively reflect the positive effects of China's fiscal policies on boosting economic growth and stabilizing the macro leverage ratio in a forward-looking manner, China's Ministry of Finance said.

TMTPost -- China highlighted its ability to maintain a sound sovereign credit and controllable risks of the local government debt after Fitch Ratings issued a warning on the credit outlook.

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It is regrettable to see the decision by Fitch Ratings to downgrade China's sovereign credit rating outlook, according to a statement of the Ministry of Finance on Wednesday. The statement was made in response to media queries after Fitch, one of the Big Three credit rating agencies in the world, decided to maintain China's sovereign credit rating, while on the same day revising its outlook on China's sovereign credit rating from stable to negative.

Fitch's rating system has failed to effectively reflect the positive effects of China's fiscal policies on boosting economic growth and stabilizing the macro leverage ratio in a forward-looking manner, the ministry said in a statement. The Chinese government has stay committed to multiple goals of support for economic development, prevention from fiscal risks and fiscal sustainability, scientifically and rationally set and maintained the deficit rate at a reasonable level given development of conditions with coordination of various demands and possibilities, the ministry said. "In the long run, maintaining a moderate deficit and making good use of the valuable debt funds is conducive to expanding domestic demand, supporting economic growth, and ultimately helping maintain sound sovereign credit," it said.

It is encouraging that China’s GDP has grown by 5.2% in the year 2023, contributing more than 30% to the global economy, while the growth target of around 5% this year China set is in line with realistic conditions and needs for development, signaling determination and confidence in high-quality development, the ministry noted. The long-term positive momentum of the Chinese economy has not changed, and the Chinese government's ability and determination to maintain sound sovereign credit also remained unchanged, it stressed.

As to the local government debt that Fitch expressed seriouos concerns, the ministry said the risks have been mitigated as the country has taken active and prudent steps to resolve them. Payments of principal local government statutory debt and interest on this debt are guaranteed, while the size of hidden debt is gradually declining. "The work on resolving China's local government debt is progressing in an orderly fashion, and the risks are generally under control," it said.

Earlier Wednesday, Fitch announced it affirmed China's Long-Term Foreign-Currency Issuer Default Rating (IDR) at A+ but downgraded the Outlook on the IDR to Negative from Stable. The Outlook revision reflects increasing risks to China's public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model, the credit rating agency said. Fitch noted wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective. It expected that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend, and contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.

Chinese financial markets reacted relatively calm to Fitch’s move. The 10-year sovereign bond yield edged higher after trading little-changed for most of the day, and the yuan steady in the Asian trading session on Wednesday. “I think the agency got the logic backwards. There are good debts and bad debts. At this stage, if the government expands its fiscal budget deficit then it will actually improve the economic outlook,” said Hao Hong, chief economist at Grow Investment Group. Goldman Sachs Group Inc. Hiked its outlook for China’s economic growth this year the same day. China’s GDP likely expanded at a 7.5% annualized pace in the first quarter from the last three months in 2023, Goldman economists led by Hui Shan said in a note. The latest anticipated growth rate in the first quarter is higher than their previous expectation of 5.6%, and their latest growth forecast of 5% for 2024 is also higher than 4.8% previously. They kept the 2025 projection at 4.2%.   

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