Fitch Ratings revises China’s credit outlook

Fitch Ratings offices at the Canary Wharf financial district in London. File picture.

Fitch Ratings offices at the Canary Wharf financial district in London. File picture.

Published Apr 11, 2024


SOUTH Africa’s economy could be under the threat of catching flu as one of its biggest trading partners sneezes after Fitch Ratings downgraded China’s credit outlook.

Fitch yesterday revised China’s sovereign credit outlook from stable to negative, while affirming its A+ rating amid mounting concerns regarding the nation's public finance outlook.

China’s wide fiscal deficits have been high since 2020, running roughly twice the 3.1% of gross domestic product (GDP) 2015-2019 average, and the 2024 deficit is forecast to be the highest since the 8.6% of GDP deficit in 2020.

Fitch’s primary rating analyst Jeremy Zook said China was contending with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model.

“We forecast the general government deficit to rise to 7.1% of GDP in 2024 from 5.8% in 2023, on a Fitch-consolidated basis, which includes infrastructure and other official fiscal activity outside the headline budget,” Zook said.

“We forecast general government debt to rise to 61.3% of GDP in 2024 from 56.1% in 2023. This is a clear deterioration from 38.5% in 2019, when debt was well below the peer median, due primarily to sustained fiscal support to counter economic pressures.”

Standard & Poor's credit rating for China stands at A+ with a stable outlook, and Moody's credit rating for China was last set at A1 with a negative outlook.

In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the creditworthiness of China, thus having a big impact on the country’s borrowing costs.

China is a major consumer of commodities globally, and since South Africa is a significant exporter of commodities, this can negatively affect South Africa’s economy and government revenues.

Anchor Capital investment analyst Casey Sparke said a worsening economic outlook for China could have several negative implications for the South African economy.

Sparke also said a slowdown in China’s economic growth could lead to a decrease in demand for commodities, resulting in lower commodity prices.

“A slowdown in China’s economy can lead to a decrease in demand for South African exports such as minerals (like platinum, gold, and iron ore), agricultural products, and other commodities,” Sparke said.

“This can negatively impact South Africa's export earnings and trade balance. China has also, for many years now, been investing in various sectors in South Africa, including infrastructure, mining and manufacturing.”

However, Anchor fund manager Peter Little said the proceeds of China’s potential debt raising were likely to be spent, at least partially, on infrastructure, which would be a boost to the South African economy from a trade perspective as it should support commodity exports (particularly iron ore).

“Investors appear fairly sanguine about the downgrade in outlook, which doesn’t have any major implications with regards China’s exclusion from any bond indices as was the case when South Africa’s long-term debt got downgraded from investment grade to junk a few years ago, so the downgrade doesn’t trigger any immediate/imminent selling from that perspective,” Little said.

“In general, most of China’s debt is issued in local currency, which makes it much less risky than the foreign currency debt that often causes crises in emerging markets. China’s debt is also largely owned by local investors which makes the bond prices less susceptible to large price movements from these rating agency changes.”

Fitch also forecasts China’s GDP growth to moderate to 4.5% in 2024, from 5.2% in 2023, due to persistent property sector weakness and subdued household consumption, resulting from negative wealth effects from the property correction and somewhat sluggish income growth.

Old Mutual Wealth investment strategist Izak Odendaal said China had sustained very rapid rates of economic growth initially by becoming the biggest source of low-cost manufactured goods in the world, and more recently through the biggest property boom the world has ever known.

Odendaal said this growth model had now run its course, and China was transitioning to a period of slower economic growth.

“It is not so much that China is catching a cold, but rather that it is getting old. An orderly slowdown is not necessarily bad news for South Africa, but we should assume that the commodity-intensive phase of China’s growth is largely over,” Odendaal said.

“China will still import commodities from us, but the volumes of commodities it needs will not grow as much as it did in the past. What happens to commodity prices will also depend on the supply picture, however, and also on demand from elsewhere.”