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Credit rating agency Fitch has announced that it has doubts about the future of Chinese finance. Earlier this month, it reaffirmed China's still strong A+ rating, but downgraded what it called the country's “outlook.” Fitch followed Moody's in taking a similar action in December last year. As expected, Beijing's Ministry of Finance expressed disappointment. It disputed Fitch's characterization of the problem, arguing that China's economy and finances are in good shape and are likely to improve. None of this should come as a surprise to readers of this column, which has spent the past 18 to 24 months documenting and explaining China's profound economic and financial challenges.
Fitch's announcement highlighted many of these challenges. Chief among them was the country's wealth crisis and how it depressed sales and activity in the region that once accounted for the dominant part of China's economy. This collapse wiped out household wealth through falling real estate values, and correspondingly suppressed personal consumption. For all these reasons, the crisis and its aftermath slowed the pace of China's economic growth. More generally, the failure of real estate developers has left the market with so much questionable debt that confidence in repayments has eroded, a fact that further inhibits the ability to lend and borrow to support future growth. There is. Fitch further criticized the Chinese government for waiting years for his action on this important issue.
As a credit rating agency, Fitch, like Moody's before it, focused particularly on the financial health of governments. It points out the huge debt burden of local governments in China. These governments were facing problems even before the real estate collapse began to unfold in 2021. These governments already face problems because Chinese practice requires local governments to issue what are called “special purpose bonds” in China to finance most of Beijing's infrastructure projects. Was. Significant debt. Now, on top of this burden, the real estate crisis has eliminated a major source of local government revenue, making it even more difficult for local governments to service their debt than before. Fitch estimates that these municipalities are hiding nearly $11 trillion worth of debt burden. Although there is no way to confirm this figure, it is worth noting that some local governments are having such difficulty meeting their debts that they are forced to cut public services.
The Chinese government has finally begun to adapt to this reality. In an effort to clean up some of the local government's stain, the government has decided to issue its own debt to fund the latest round of infrastructure spending. It plans to issue about 1 trillion ($139 billion) in bonds from its own budget. The Chinese government has announced plans to use so-called “ultra-long maturities.” There are two insights from this decision. One is that the Chinese government is not expecting an early return on its spending. Second, the government is sensitive to its own budgetary concerns and wants to delay repayments as long as possible.
The situation seems to require such positioning. The Chinese government officially puts this year's budget gap at 3% of gross domestic product (GDP), but Fitch estimates the number is likely to be slightly higher than 7%. Moreover, central government debt is likely to rise from around 56.1% of GDP last year to more than 61% this year.
No matter how you look at these issues, it doesn't paint a pretty picture. And, as this column has documented, this situation could soon improve significantly, especially given Beijing's weak response to the real estate crisis and the opposition to trade with China in the United States, Europe, Japan, and many developing countries. Unlikely. Indeed, it appears to be out of kindness, or perhaps politics, that Fitch and Moody's have not downgraded China's existing rating and remain focused on China's outlook. Nevertheless, China's problems are becoming more fully recognized day by day.
