Fitch cuts China’s ratings outlook on growth risks: Will India stand to benefit?

Fitch has cut its outlook on China’s sovereign credit rating to negative on Wednesday, citing risks to public finances. China’s economy, it has said, is facing increasing uncertainty in its shift to new growth models. The outlook downgrade follows a similar move by Moody’s in December and comes as the country is working towards recovery of its feeble post-COVID economy with fiscal and monetary support, stated a Reuters report. 

“Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt,” said Gary Ng, Natixis Asia-Pacific senior economist, to Reuters. “This does not mean that China will default any time soon, but it is possible to see credit polarization in some LGFVs (local government financing vehicles), especially as provincial governments see weaker fiscal health.”

On China’s new growth model, NR Bhanumurthy, Vice Chancellor, Dr BR Ambedkar School of Economics University, said, “It is a deliberate attempt by the Chinese government to shift their growth model from exports and manufacturing towards other sectors. I think it is a soft landing they are planning and at the same time, it is a deliberate attempt by the government to shift the structure of the economy.”

Fitch expects China’s explicit central and local government debt to rise to 61.3 per cent of gross domestic product (GDP) in 2024 from 56.1 per cent in 2023 – a clear deterioration from 38.5 per cent in 2019. At the same time, Reuters said that Fitch expects China’s general government deficit – which covers infrastructure and other official fiscal activity outside the headline budget – to rise to 7.1 per cent of GDP in 2024 from 5.8 per cent in 2023, the highest since 8.6 per cent in 2020, when Beijing’s strict COVID curbs weighed heavily on the economy.

Fitch forecast China’s economic growth would slow to 4.5 per cent in 2024 from 5.2 per cent last year, while the International Monetary Fund expects China’s GDP to grow 4.6 per cent this year.

“The outlook revision reflects increasing risks to China’s public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model,” Fitch said.

Will it have any impact on India? 

Madan Sabnavis, Chief Economist, Bank of Baroda, said, “Ratings are country specific and hence change in outlook for China will not have a bearing on India. China has been under pressure with growth slowing down starting Covid. Hence fiscal pressures too increased. The message is that we have to be watchful on our debt levels as they would be looked at closely by the rating companies. Here we are comfortable with levels tending to go downwards. We don’t see deficits slipping with GDP growth being stable. Hence tax collections will be buoyant. Therefore we will not be affected by the China action.”

Meanwhile, NR Bhanumurthy, vice chancellor, Dr BR Ambedkar School of Economics University, said that while it may not have any major impact on India, it still stands a chance to invite more investments into the country. “Whether India is in a position to be a substitute for the investment that was supposed to go to China, is a point of contention. There is a stiff competition from Vietnam, Bangladesh, Indonesia and other emerging economies. While India will still remain a part of this, I am not sure if all of these investments will be directed towards the country. India, however, will be the first choice for the investors. But India is currently focusing on sunrise sectors and not necessarily on traditional sectors. There are still a lot of crucial reforms impending from the government that would help invite more investment into the country. While India is at the right place for foreign investment for the whole world, the new government (after the general elections) will have to work on these required reforms to facilitate the investment inflow,” he said. 

China’s overall debt-to-GDP ratio climbed to a new record of 287.8 per cent in 2023, 13.5 percentage points higher than a year earlier, according to a report by the National Institution for Finance and Development (FIND) in January.

Following the announcement, China’s finance ministry said that it regretted Fitch’s ratings decision, vowing to take steps to prevent and resolve risks from local government debt.