“The long-term positive trend of China’s economy has not changed, nor has the Chinese government’s ability and determination to maintain good sovereign credit.”
‘We can’t fall behind’: China’s local debt woes hurt firms, create distrust
‘We can’t fall behind’: China’s local debt woes hurt firms, create distrust
The ministry added that the local debt risk was “controllable”, and that de-risking was progressing in an orderly manner.
But the move by Fitch comes at a delicate time for the world’s second-largest economy, with China set to release its first-quarter data on Tuesday, which is expected to show a rebound in economic activities.
The finance ministry, which had deep and extensive discussions with Fitch before the downgrade, said that it had scientifically and rationally arranged the scale of the fiscal deficit, and kept the rate at a reasonable level.
The Chinese government always takes into account multiple goals like supporting economic development, preventing fiscal risks and achieving fiscal sustainability
“Keeping the deficit rate at a reasonable level, 3 per cent in 2024, is conducive to stabilising growth, controlling the government debt ratio and reserving policy space to deal with risks and challenges in the future,” the ministry said.
“In the long run, maintaining a moderate deficit and making good use of precious debt funds will help boost domestic demand, support growth and in turn help maintain good sovereign credit.
“The Chinese government always takes into account multiple goals like supporting economic development, preventing fiscal risks and achieving fiscal sustainability.”
Fitch did maintain its A+ rating for China’s sovereign bonds, but the rating remains lower than the AA+ rating for US bonds.
The rating means China’s sovereign bonds are still considered to have an upper-medium investment grade.
Many investment banks have started to show optimism in China’s economy, with higher growth estimates, after economic activity data so far this year has shown some signs of stabilisation.
Citi lifted its annual growth forecast from 4.6 per cent to 5 per cent, while Nomura raised its projection from 4 per cent to 4.2 per cent.
However, there are increasing calls for stronger fiscal stimulus to ensure this year’s growth target.
“Fitch believes 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 upwards trend,” the rating agency said.
“Contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.”