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- Ratings agency downgrades China debt outlook over economic uncertainty
Fitch’s downgrading of China’s credit outlook today highlights the dilemma that policymakers are facing, as they try to stimulate growth and cut debt levels, explains Lynn Song, chief economist for Greater China at ING:
On one hand, there is certainly a need to support economic growth in the near term, and fiscal support in our view is important in order to avoid falling into a so-called “Japanisation” trap, where the economy enters into a negative feedback loop of weak confidence, falling asset prices, and slower economic growth. This will cause government debt levels to rise in the near term.
On the other hand, long-term fiscal consolidation efforts remain important. In China’s case, finding a viable alternative for land sales is an important step to take in the medium term, but the obvious solutions to this – like increasing other taxes – are unpalatable at the moment given the current state of the economy. Nonetheless, the land sale driven model of government financing will also need to change as China’s economy transitions.
“Fitch’s outlook revision reflects the more challenging situation in China’s public finance regarding the double whammy of decelerating growth and more debt.”
“With lagging private investment, state-backed funding has become even more important in driving growth, either in terms of infrastructure spending or in local government guidance funds for high tech industries.”
A credit rating agency (it does not matter which) has done something (it does not matter what) to China’s rating outlook. Investors will already be aware of the underlying economics behind this move.
