Fitch is worried about Chinese finance. Earlier this month, while reaffirming China’s still-high A+ rating, the credit-rating agency downgraded what it calls the country’s “outlook.” In this, Fitch has followed another rating agency, Moody’s, which did the same thing in December 2023.
Predictably, Beijing’s finance ministry objected, asserting that Chinese economics and finance are in fine shape and likely to improve. None of this should come as a surprise to readers of this column, which has, over the past 18–24 months, chronicled and explained China’s severe economic and financial challenges. If anything, Fitch and Moody’s did not go far enough.
Still, more generally, the failure of property developers—by saddling many with questionable debt—has undermined confidence within China’s financial community. No one party can be sure of the financial health of another, and this distrust has hamstrung the ability of Chinese finance to support future growth. Fitch further faults Beijing for waiting years to act on this important matter.
While discussing this general and depressing economic picture, Fitch understandably focused on the health of government finances. The agency points out that local governments face great debt difficulties. Even before the property collapse began to unfold in 2021, local governments supported a heavy debt burden because Beijing has a practice of having them use what is called “special-purpose bonds” to finance major infrastructure projects.
Even as local governments struggled with this debt burden, the effects of the property collapse have denied them major sources of revenues, making it even harder than before for them to service their debts. Fitch estimates that these local governments have debt burdens approaching $11 trillion. Though there is no way to verify this figure, it is noteworthy that some local authorities have had so much difficulty servicing their debts that they have had to cut back on public services.
Beijing has only just begun to adjust to this reality. So as not to burden struggling local governments any further, it has decided to issue its own debt to finance its latest infrastructure spending, presumably to stimulate a faltering economy. It will issue some 1 trillion yuan (about $138 billion) in bonds for infrastructure spending. It plans to use what it calls “ultra-long maturities.”
This decision suggests two things, neither of them encouraging. First, Beijing does not expect an early payoff from its spending. Second, with an eye to its own budget concerns, the authorities would like to delay any repayments for as long as possible.
This positioning is hardly a surprise. Though Beijing has officially put its budget gap this year at 3 percent of China’s gross domestic product (GDP), Fitch says a figure just above 7 percent is more likely. What is more, the outstanding central government debt is expected to rise from some 56.1 percent of GDP last year to more than 61 percent this year.
Any way it is presented and almost regardless of the source, it is not a pretty financial picture. And, as this column has documented, it is unlikely to get appreciably better any time soon, especially given Beijing’s weak response to the property crisis and the pushback against Chinese trade in the United States, Europe, Japan, and much of the developing world.
Indeed, it seems that only kindness—or, more likely, politics—has kept Fitch and Moody’s concentrating on the outlook and not downgrading China’s existing rating. In any case, China’s problems are getting more fully recognized every day.
