Fitch has revised down China's sovereign credit outlook from stable to negative, a move Beijing says is rooted in flawed methodology.
The U.S. rating agency cited "increasing risks" to public finances as the world's second-largest economy transitions from relying on its debt-ridden property sector for growth to what President Xi Jinping has dubbed "high-quality development."
The downgrade suggests concerns about China's ability to manage debt and fiscal challenges effectively. It comes as the central government tries to course-correct after the years of a development model that incentivized rapid land development and overborrowing to maintain sky-high growth.
"Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective, Fitch said in its quarterly report on structured finance credit, released Tuesday.
Though Xi has so far resisted calls for major stimulus amid muted post-pandemic consumer confidence, Fitch believes fiscal policy will continue to drive up public debt.
China's Ministry of Finance lamented the rating in a question-and-answer session on Wednesday, saying Fitch's methodology failed to "reflect the positive role of China's fiscal policy in promoting economic growth and stabilizing the macro-leverage ratio," or an economy's debt relative to Gross Domestic Product (GDP).
Even as it lowered China's outlook, however, Fitch affirmed an "A+" credit rating for the country, citing its "large and diversified economy, still solid GDP growth prospects relative to peers, integral role in global goods trade, robust external finances, and reserve currency status of the yuan."
Economist George Magnus, associate at the University of Oxford China Centre, told Newsweek the downgrade was a warning, though not a surprising one, and would have little effect on policy.
"If the rating did get lowered in future, that would of course impact China's borrowing costs. It's not going to cause Beijing to deviate from Xi's emphasis on high-quality development or investment in new productive forces, but it serves notice that the pursuit of these campaigns isn't a given if the economy, as Fitch believes, is stressed by lower growth, weak demand and macro imbalances." he said.
Earlier this year, Beijing again set a goal of "around 5 percent" GDP growth after claiming to have met this threshold last year, bucking expectations.
The Fitch report follows Moody's own downgrade of China's government credit ratings from "stable" to "negative" in December.
The credit rating agency based the outlook on "rising evidence that financial support will be provided by the government and wider public sector to financially stressed regional and local governments and state-owned enterprises, posing broad downside risks to China's fiscal, economic and institutional strength."
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Micah McCartney is a reporter for Newsweek based in Taipei, Taiwan. He covers U.S.-China relations, East Asian and Southeast Asian ... Read more
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