Fitch Ratings' outlook significantly underestimates China's economic growth

According to the data released by the National Bureau of Statistics, in the first two months of this year, production demand rose steadily, employment prices were generally stable, the quality of development continued to improve, and the economic operation continued to pick up and improve, with a steady start. The picture shows that in Rizhao Port, Shandong Port, cargo ships are berthed at the container terminal for loading and unloading operations. Xinhua

Reporter of China Development and Reform News | Yuan Lin

On April 10, Fitch International Credit Rating Co., Ltd. issued a report that kept China's sovereign credit rating unchanged but revised its outlook to "negative" from "stable". In response, the relevant person in charge of the Ministry of Finance responded that it is regrettable to see Fitch downgrade the outlook of China's sovereign credit rating. There has been extensive in-depth communication with the Fitch Ratings team in the early stage, and the report also partially reflects China's views. However, the results show that the indicator system of Fitch Sovereign Credit Rating Methodology fails to effectively and forward-looking reflect the positive effect of fiscal policy on promoting economic growth and stabilizing macro leverage.

China's deficit rate in 2024 is moderate and reasonable overall

The person in charge said that the Chinese government has always adhered to the multiple goals of supporting economic development, preventing fiscal risks and achieving fiscal sustainability, and has scientifically and rationally arranged the scale of the deficit according to the changing situation and the needs and possibilities, so as to keep the deficit rate at a reasonable level.

In 2024, the mainland's deficit ratio will be arranged at 3%, which is moderate and reasonable on the whole, which is conducive to stable economic growth, and can also better control the government's debt ratio, so as to reserve policy space for coping with possible risks and challenges in the future. The person in charge said that looking back on 2023, China's GDP will grow by 5.2%, contributing more than 30% to the world economy, which is exciting. This year, the expected target of about 5% is set, which is in line with realistic conditions and development needs, and conveys the determination and confidence of high-quality development.

"The long-term positive trend of China's economy has not changed, and the Chinese government's ability and determination to maintain its good sovereign credit have not changed. The person in charge said.

It is understood that the Ministry of Finance will arrange a national fiscal deficit of 4.06 trillion yuan in 2024, an increase of 180 billion yuan from the budget at the beginning of last year, and the estimated deficit rate is 3%, the same as the budget at the beginning of last year.

"An appropriate fiscal deficit is conducive to giving full play to the government's positive role in debt financing and maintaining the necessary support for high-quality economic and social development. The person in charge said that such an arrangement is conducive to maintaining the necessary expenditure intensity, giving full play to the role of fiscal counter-cyclical adjustment, stabilizing and boosting market confidence, and is also conducive to coordinating development and security, preventing government debt risks, and leaving room for dealing with complex and difficult situations in the future.

The risk of Chinese government debt is generally manageable

According to experts, concerns about government debt are the main considerations for Fitch in downgrading the mainland's credit rating. In fact, both in terms of indicators of government debt levels and market demand for government bonds, the risk of Chinese government debt is generally controllable.

According to the National Balance Sheet Research Center of the Chinese Academy of Social Sciences, the leverage ratio of the Chinese government will be 55.9% in 2023. Among them, the leverage ratio of the central government is 23.6%, and the leverage ratio of local governments is 32.3%.

Lu Jiangyuan, an associate researcher at the Institute of Economics of the China Academy of Macroeconomics, said in an interview with reporters that in recent years, the central government's leverage ratio in China's government debt is not high, and there is room to help local governments control leverage through the central government's leverage.

At the same time, he pointed out that both domestic and foreign investors are keen to buy Chinese government bonds as a safe asset. According to the People's Bank of China, as of the end of 2023, the scale of RMB bonds held by foreign institutions and individuals was 3.72 trillion yuan, a significant increase of 1.46 trillion yuan from the end of 2019.

In terms of preventing and resolving local government debt risks, in recent years, the Ministry of Finance has also arranged a certain scale of refinancing government bonds within the local government debt limit space to support local governments, especially high-risk areas, to resolve the hidden debts of financing platforms and clear up the government's arrears to enterprises, so as to alleviate the pressure of centralized repayment of mature debts and reduce the burden of interest expenses.

At the same time, in accordance with the principle of "the province bears the overall responsibility, and the cities and counties do their best to reduce debts", all localities have coordinated all kinds of resources, formulated plans for debt reduction, and clarified specific measures one by one, so that local debt risks have been alleviated as a whole.

According to reports, through the efforts of various quarters, the payment of principal and interest of local government statutory debts has been effectively guaranteed, and the scale of hidden debts has gradually declined; positive progress has been made in the work of settling the debts owed by the government to enterprises, and the number of local financing platforms has decreased.

"On the whole, at present, the debt resolution of local governments in mainland China is progressing in an orderly manner, and the risks are generally controllable. The relevant person in charge of the Ministry of Finance said that in the next step, the Ministry of Finance will continue to strengthen the management of local government statutory debts with relevant parties and further promote the implementation of the package of debt programs.

The "four major effects" support the mainland's economy to continue to rebound

It is understood that when downgrading the outlook of China's sovereign credit rating, Fitch predicts that China's GDP will grow by 4.5% in 2024, which is significantly lower than the forecast of other international institutions, JPMorgan Chase, Goldman Sachs, UBS, and Citigroup forecast China's GDP growth in 2024 to be 4.8%, 4.9%, 5% and 5% respectively, and the forecast value of well-known domestic institutions such as the Chinese Academy of Social Sciences, the State Information Center, the Bank of China, and Galaxy Securities is about 5%.

"A country's economic growth is an important consideration for sovereign credit ratings. Fitch's forecast for China's 2024 economy is lower than other results, which inevitably calls into question the reliability of its sovereign credit rating. Li Ruoyu, a senior economist and deputy director of the Financial Research Office of the Forecasting Department of the State Information Center, believes that Fitch is clearly underestimating the actual situation of China's economic growth.

Despite the revised outlook, Fitch maintains a high rating of 'A+' on China, reflecting the recognition of the mainland's economic growth prospects, status as a global commodity trading center, and robust external financial conditions by foreign rating agencies. According to Lu, the main supporting factors include a large and diversified economic system, still having a solid economic growth expectation relative to other countries, the central position of global merchandise trade, a healthy external financial situation, and the status of the renminbi as a reserve currency.

"These are the bright spots of the mainland's economic performance, which shows that Fitch, a foreign rating agency, fully affirms the fundamentals of the mainland economy and is optimistic about the growth trend. Lu Jiangyuan said.

As Fitch points out, while global supply chain diversification is accelerating, China's central position in global supply chains has been maintained thanks to its advanced manufacturing ecosystem and high-quality infrastructure.

In fact, China's real economic growth has often exceeded the forecasts of international institutions, and has become an important engine for the steady growth of the world economy. China's economic growth rate of 5.2% in 2023 is not only higher than the global growth rate of about 3%, but also ranks among the world's major economies, contributing about 30% to world economic growth.

According to the forecasts of authoritative international institutions such as the United Nations, the World Bank, the International Monetary Fund, and the OECD, China's economic growth performance will continue to rank among the top major economies in 2024.

Li Ruoyu said that in 2024, the momentum of world economic growth will be insufficient, and regional hot issues will occur frequently, but the favorable conditions for the mainland's economic development will be stronger than the unfavorable factors, and the basic trend of economic recovery and long-term improvement has not changed. The "four major effects" of domestic macro policies to increase efficiency, accelerate the cultivation of new kinetic energy, accelerate the release of reform and opening up dividends, and accelerate the filling of output gaps, the "four major effects" support the mainland's economy to continue to rebound and improve.

The prospect of China's solid economic growth has become the consensus of all parties. Fitch expects China's GDP to grow faster than its peers by 2028, and international investment banks such as Goldman Sachs and Morgan Stanley have recently raised their forecasts for China's growth this year.