In the dominance of global economics, China continues to be a giant whose action and inaction reverberates across the market. Most recently, Fitch Ratings, a leading credit rating firm, sent shock waves across financial circles by influencing China’s Long-Term Foreign-Currency Issuer Default Rating outlook to Negative from Stable while its IDR rating was affirmed at ‘A+’. This development sent ripples of shock among financial experts who have continued to discuss the viability of China’s economy amid its potential global influence. Let’s delve deeper into Fitch’s analysis and explore the intricacies of China’s economic landscape.
Negative Outlook Rationale
Fitch Ratings revised China’s public finance outlook from Stable to Negative, highlighting the growth transition and fiscal concerns. A proper growth model is the transition of China’s economy. The ongoing transition needs to change from a growth model that depends largely on the property sector to one that grows more sustainably. However, it could also lead to various uncertainties in terms of continued fiscal deficits and rising government debt. A new growth model brought its challenges.
China’s government has spent more money than it has earned in recent years, leading to fiscal deficits of 8.6 % of GDP. The government has also taken significant loans, which have resulted in a higher debt burden. Fitch is concerned about the high likelihood of the government continuing to use fiscal policy to boost growth, which is believed to fuel more debt.
It cites it as one of the likelihoods, which will see the country’s fiscal policy prompt further growth of debt. Other risks include the increase of contingent liability risks in the capital and banking sector, weakening China’s ability to address its high economy-wide leverage.
Ultimately, lower nominal growth growth rates could also worsen the situation and make difficult to address fiscal imbalances. Fitch’s decision to cut China’s outlook to Negative implies that the agency sees increasing risks concerning China’s public finance outlook. It most appreciates the country’s transition but sees continued high inflation-fiscal challenges on hand without changes.
Key Rating Drivers
Fiscal Stimulus and Deficits
Due to the current economic challenges, Fitch Ratings projects that the Chinese government will implement significantly increased fiscal stimulus. In Fitch’s understanding, increased stimulus, in response to economic headwinds, will contribute to a sharp increase in the general government deficit. More specifically, Fitch Ratings projects the deficit to be 7.1% of the GDP in 2024, a significant rise from the 5.8% of the GDP recorded in the previous year.
Essentially, this a new fiscal expansion policy as opposed to the contractionary fiscal policy that had characterized previous periods. This policy pertains directly to Fitch’s expectations of the possible changes in Chinese fiscal deficits. The current expected increase in fiscal deficits is highly reflective of this fiscal policy.
Fitch’s analysis is comprehensive as it considers not only the primary budget but also the primary fiscal stimulus, including infrastructure, and other officially protected acts. According to Fitch, the current deficits average at about twice as the averages recorded between 2015 and 2019, which is 3.1%.
In fact, even the expected deficit of 7.1% of the GDP foreseen by Fitch in 2024 is substantially higher than many other previous deficits. It is the highest of deficits expected since 2020, which accounted for 8.6% of GDP. The trend of deficits trending higher than in previous years reflects the nature of fiscal support performances in China. In forex trading, such activities are relevant, as they are likely to affect how one currency fares against the other.
Central Government Intervention
As local and regional governments encounter fiscal challenges, China’s central government CG has polled up its financial resources to lessen the pressures. The central government is expected to bear the lion’s share of fiscal burden in 2024 as LRG finances are constrained by dwindling revenue from land-based and debt accumulations.
To align the reduced revenue inflows with CG’s economic priorities, the Chinese central government has projected the issuance of vast amounts of bonds. In 2024, ultra-long debt papers amounting to CNY1 trillion, which represented 0.8% of the GDP, were anticipated by the CG. A parallel bond issuance of the same caliber was issued in 2023 to cope with similar fiscal constraints.
By expanding its issuance of debt papers, the CG demonstrates its determination to offer financial backing to regions grappling with fiscal constraints. The central government aims to offset the adverse effects of LRG financial constraints driven by accumulating debts and declining revenue through heightened fiscal burdens.
Such fiscal measures underscore the central government’s commitment to proactive economic progress by backing sustainable initiatives. As part of its commitment, the CG issuance of bonds aims to inculcate liquidity into the economy while promoting economic activities and sustaining LRG infrastructural development initiatives.
Higher Government Debt
General government debt in China will continue its rising trajectory, with forecasts indicating the rise to 61.3% of GDP in 2024. The rising debt levels result from continued implementation of fiscal support measures to counter economic challenges. The rising debt leaves questions regarding its sustainability and the implications for fiscal stability.
Based on the forecasts, general government debt, which includes local and central government explicit debt, is forecasted to be 61.3% of GDP in 2024, up from 56.1% in 2023. This indicates a significant deterioration compared to the 2019 level of 38.5%, which was much below the median peer. The driver of rising debt is the continuous fiscal support to address economic challenges.
The debt-to-revenue ratio is forecasted at 234% in 2024, significantly surpassing the median peer of 145% for ‘A’ rated. Forecasts also show an increase in the debt ratio to 64.2% in 2025 and almost 70% in 2028, more than previous forecasts.
The uncertainty regarding the extent to which fiscal support can re-ignite the underlying GDP growth remains a key factor contributing to a rising trajectory of debt. Nevertheless, risks stemming from higher government debts are partly cushioned by the high domestic savings rate, which underpins debt affordability and finance distribution. Despite these cushions, continuous rising debt implies the need for prudent fiscal and other measures to ensure long-term sustainability.
Uncertainty in Growth Trajectory
On the economic front, the growth trajectory is likely to envision a moderation phase in China because of the witness of the property sector’s weaknesses and even littler household consumption. The fiscal has remained abnormally accommodative in an attempt to stimulate growth. It is uncertain whether these measures will be sufficient for economic expansion.
Contingent Liabilities and Risks
The risks contingent on liabilities, including LGFVs, also remain a worry – though more such risks are visible even as incremental measures are put in measures to mitigate existing and emerging risks. They present a risk to fiscal resources: some fiscal entities are considered to benefit from expected government support – according to letters obtained.
Meanwhile, nonfinancial corporate liabilities, at 167% of GDP as at end-3Q23, underline the immense size of these risks. In our baseline scenario, we do not foresee large-scale balance sheet support. Instead, incremental support will likely be dispensed through policy institutions and state banks to address possible financial stability risks and preserve economic and social stability.
Implications for Forex Trading
Given the pivotal role of China in the global economy, Fitch’s negative outlook revision has multiple implications for forex trading. As China faces the following challenges, forex traders need to monitor the following factors to interact with this country’s economy effectively.
Investor sentiment and currency valuation
The increased fiscal stimulus and government debt levels implemented in China may negatively affect investors’ sentiment, undermining various currencies’ valuations. Therefore, traders should watch the changes in the attitude toward Chinese assets, as this will have a far-reaching effect on currencies worldwide. This sentiment change may also result in the worsening valuation of the Chinese yuan against other significant currencies, affecting the strategy of forex trading.
Policy developments and market dynamics
In light of economic difficulties, China’s policymakers can introduce certain measures to stabilize the economy. These interventions can include interest rates adjustments and capital controls which impact the overall dynamics of the market and shape the currency’s valuation. Therefore, it is critical to monitor the updates on policies and speculate on their impact on traders’ sentiment and trading volume.
Economic indicators and market sentiment
Forex traders should also follow the Chinese economic health signs that influence the market. Key indicators include GDP growth, inflation rates, and financial losses, each of which can reveal valuable insights into the Chinese economy’s performance. In case any of those indicators are changed, they will cause a change in traders’ sentiment, and their trading strategy as well.
Geopolitical factors and Chinese trade
Geopolitical and trading relations between China and its most active trading partner – the U.S. are also highly influential. Trading negotiations, tariffs increase, or diplomatic tensions tend to cause the currency volatility and market mater uncertainty. Therefore, you should follow the publications concerning those issues and modify the strategy accordingly.
Conclusively
In conclusion, Fitch Ratings’ pays close attention to China’s Long-Term Foreign-Currency Issuer Default Rating following the downgrade of the outlook to Negative. This choice reflects the numerous obstacles that China’s economy faces, from surging fiscal deficits to escalating levels of state debts to doubts about its forecasts of economic expansion. Traders must follow these events carefully in forex trading.
In the context of the global market, the state’s policy alterations and economic and geopolitical performance may influence skilled judgements. With that reality in mind, China’s geo-economic tact has a significant influence on forex trading, and therefore accurate, and real-time trading cannot occur without understanding the ever-changing state of China’s trading affairs.
