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Roving Periscope: Ailing, but China rejects Fitch’s downgrade, claims its economy is stable

Roving Periscope: Ailing, but China rejects Fitch’s downgrade, claims its economy is stable

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Virendra Pandit

New Delhi: Despite reeling under economic reverses since the outbreak of COVID-19 and its domino effect, particularly after its real estate sector went almost bust, China has, however, rejected Fitch’s fresh rating and claimed that its economy is “stable.”

According to the media reports, China’s Finance Ministry denounced a report by Fitch Ratings that kept its sovereign debt rating at A+ but downgraded its outlook to negative, claiming on Wednesday that the country’s deficit is at a moderate and reasonable level and risks are under control.

Fitch said the risks to China’s public finances are rising. Beijing is trying to resolve mounting local and regional government debts and to shift away from heavy reliance on its troubled property industry, which formed almost a third of its GDP until 2020, to drive economic growth.

Despite slower growth adding to the challenges of coping with heavy borrowing, Fitch said it kept China’s A+ rating because of its large and diversified economy, its vital role in global trade, and its huge foreign exchange reserves.

The Finance Ministry claimed that Fitch failed to take into account Beijing’s moves toward appropriately intensifying, and improving the quality and efficiency of its government spending.

In the long run, maintaining a moderate deficit and making good use of precious debt funds will help expand domestic demand, support economic growth, and ultimately help maintain good sovereign credit, the ministry said, adding China’s local government debt resolution work is progressing and risks are generally controllable.

Fitch reported that China’s general government deficit could rise this year to 7.1 percent of its GDP, up from 5.8 percent in 2023. The median for countries with an A” rating is 3.0 percent, it said. China’s average deficit to GDP ratio averaged 3.1 percent in 2015-2019 but jumped to 8.6 percent in 2020, during the COVID-19 pandemic.

The Fitch report said tax relief measures and weaker property investments, which are usually a main source of local tax revenue, have eroded the government’s capacity to collect tax revenues to offset higher spending.

Fitch forecasts that China’s economy will expand at a meager 4.5 percent annual rate this year, down from 5.2 percent last year, because of the severe downturn in the property sector and lackluster consumer spending, although it said higher government spending is likely to help make up for some of that weakness.

While the government is supporting some property developers struggling to repay their debts after a crackdown on excessive borrowing, analysts have warned that the financial troubles are now rippling across construction companies and other industries linked to real estate.

On Tuesday, for example, a leading listed Chinese cement company’s market capitalization dropped by 99 percent in just 15 minutes.

Another rating agency, Moody’s, downgraded China’s credit rating outlook in December, ING economists noted in a report on Wednesday.
It said that, in general, the debt situation worsened rapidly since the pandemic.

Fitch’s move reflects the dilemma all policymakers face, it said.

Failing to restore growth and confidence would weaken the GDP side of the debt-to-GDP equation, and could have an equally harmful impact on long-term debt sustainability, it said. However, it is important that fiscal spending from this point onward is directed toward productive areas of growth for the future.


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