Amid a complex economic landscape, Fitch Ratings has adjusted its outlook on China’s creditworthiness, signaling caution over the nation’s fiscal health as it grapples with post-pandemic recovery efforts.

What Happened: Fitch Ratings has revised its outlook on China’s sovereign credit rating to negative from stable while affirming an ‘A+’ rating, Reuters reported on Wednesday. The revision reflects concerns regarding China’s public finances amid prevailing economic uncertainties.

The revision by Fitch follows a similar move by Moody’s in December. China is actively attempting to stimulate its economy, which has been sluggish in the aftermath of the COVID-19 pandemic, through various fiscal and monetary initiatives.

“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, a senior economist at Natixis in the Asia-Pacific region.

Fitch predicts a substantial rise in China’s government debt, projecting it to reach 61.3% of GDP in 2024, up from 56.1% in 2023 and a significant leap from 38.5% in 2019. The agency also expects the general government deficit to widen to 7.1% of GDP in 2024, an increase from 5.8% in the previous year.

While there are indications of economic recovery in China, with factory output and retail sales surpassing expectations, Fitch stresses that broad fiscal deficits and escalating government debt are eroding China’s fiscal buffers and heightening contingent liability risks.

Responding to Fitch’s revision, China’s finance ministry expressed disappointment and reaffirmed its commitment to mitigating local government debt risks. The ministry emphasized the critical role of managing deficits and effectively employing debt funds to promote economic growth and preserve sovereign credit health.

According to Benzinga Pro, iShares MSCI China ETF (NASDAQ:MCHI) closed at $40.50, a slight increase of 0.90% from its previous close.

Why It Matters: The ASEAN+3 Macroeconomic Research Office (AMRO) recently projected that China’s economy is expected to grow by 5.3% this year, driven by a stabilizing property sector and increased external demand. This optimistic outlook, however, is contrasted by the cautious stance of Fitch Ratings due to the nation’s fiscal challenges.

Earlier in April, investment strategist Henry Greene from KraneShares suggested that China’s stock market had bottomed out, indicating a potentially rare investment opportunity. This perspective aligns with the views of emerging markets fund manager Mark Mobius, who in February highlighted the potential for hidden gems in the underperforming Chinese and Hong Kong markets.

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Fitch Revises China's Credit Outlook To Negative Amid Economic Challenges