Fitch has revised China’s outlook from stable to negative, stating that the government risks accumulating debt as it seeks to steer the economy away from a slowdown caused by real estate. Increasing uncertainty about the prospects of the world’s second-largest economy, in a context where Beijing aims to make growth less dependent on housing, puts pressure on the country’s public finances. Fiscal policy is increasingly likely to play a significant role in supporting growth in the years ahead, which could keep debt on a consistently upward trend.

The Chinese government swiftly and confidently responded, asserting that the rating agency had not fully considered the role of fiscal policy in supporting growth, a factor that helps stabilize the debt burden. This proactive stance, coupled with the stability of the yuan and the relatively unchanged yield on Chinese 10-year sovereign bonds, provides a reassuring outlook.

Fitch’s move, following a similar one by Moody’s in December, is not expected to significantly impact the market. At this stage, investors focus more on a growth slowdown rather than increasing sovereign default risks. Investors are well-informed and understand China’s debt problem and real estate crisis.

Chinese public debt has increased rapidly over the past twelve years as the government injected funds into the economy to maintain the world’s highest growth rates it had posted in previous decades. Faced with the real estate crisis that now threatens to slow production and global investor concerns, the government has introduced new stimulus measures and signalled that more could follow.

According to the Bank for International Settlements, public debt was nearly 80% of gross domestic product in the middle of last year, about double the mid-2010s figure. This figure is much lower than that of many advanced economies like Japan and the United States but relatively high for an emerging market. Beijing’s own measure of public debt shows 56% of GDP at the end of 2023, a sharp increase since the pandemic.

China’s borrowing in its own currency is a key factor ensuring the country faces no risk of experiencing the type of debt crisis that has plagued other developing countries. This financial strategy, coupled with that one-third of the banking system is government-owned, provides a strong sense of security and stability.

Although Fitch has lowered its outlook, it has maintained China’s long-term default rating for foreign currency issuers at A+. China’s rating in our country’s risk remains unchanged at “Low Risk”.