China’s Financial Outlook Receives Yet Another Downgrade
China’s financial outlook has received yet another downgrade, this time from credit-rating agency Fitch. While Fitch allowed China to maintain its high A+ credit rating, it downgraded the country’s outlook, following in the footsteps of Moody’s, which did the same last December. This downgrade has raised concerns about China’s finance and has led to a clash with Beijing’s finance ministry, which believes that the country’s economics and finance are in good shape and likely to improve.
This downgrade should not come as a surprise to those who have been following China’s economic and financial challenges, as this column has been chronicling and explaining them over the past 18-24 months. In fact, Fitch and Moody’s may not have gone far enough in their assessment.
One of the major problems highlighted by Fitch is China’s property crisis, which has had a significant impact on the country’s economy. The collapse of the property market has depressed sales and activity in this once-dominant sector, leading to a decrease in household wealth and a subsequent decline in consumer spending. This crisis has not only undermined China’s overall growth potential but has also eroded confidence within the financial community. The failure of property developers, burdened with questionable debt, has created distrust among financial institutions, hampering their ability to support future growth. Fitch criticizes Beijing for not taking action on this matter sooner.
Fitch also points out the heavy debt burden faced by local governments in China. Even before the property collapse, these governments were already struggling with debt due to the practice of using “special-purpose bonds” to finance major infrastructure projects. With the loss of revenue caused by the property crisis, servicing these debts has become even more challenging. Fitch estimates that local governments have debt burdens approaching $11 trillion, and some have been forced to cut back on public services. Beijing has responded by issuing its own debt to finance infrastructure spending, indicating that it does not expect an early payoff and would like to delay repayments for as long as possible.
These financial troubles extend to the central government as well. Despite officially stating a budget gap of 3% of China’s GDP, Fitch believes that the actual figure is closer to 7%. Additionally, the outstanding central government debt is expected to rise from 56.1% of GDP last year to over 61% this year. This paints a bleak financial picture for China, and it is unlikely to improve anytime soon, especially with the weak response to the property crisis and the pushback against Chinese trade from various countries.
Fitch and Moody’s decision to focus on the outlook rather than downgrading China’s rating entirely may be influenced by political factors rather than a true reflection of the country’s financial situation. Regardless, it is clear that China’s problems are becoming more widely recognized with each passing day.
Opinions expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.
