Greater fiscal support is supportive of growth, but a deterioration in government debt metrics would add to downside pressure on China’s sovereign rating depending on the degree to which it can induce an acceleration in underlying demand and ease deflationary pressures, the rating agency said in a release.

However, uncertainty persists around the magnitude and form of the fiscal response, it noted.

Fiscal policy was broadly neutral in over the first three quarters of the year, despite Fitch’s and the budget’s forecast of a slightly stimulatory stance.

The authorities now appear set to accelerate local government issuance of the unused special-purpose bond (SPB) quota, Fitch observed. This stepped-up issuance was included in Fitch’s latest growth forecasts in September, but the risks of fiscal underspending in 2024 have reduced.

The fiscal policy announcements appear to be focusing on managing local government hidden debt risks through further ‘debt swaps’ and recapitalising bank balance sheets, Fitch noted.

Such measures are unlikely to significantly boost near-term economic activity, but could help address structural challenges from high economy-wide leverage, particularly among local government financing vehicles (LGFVs), which have been exacerbated by weak nominal growth, it remarked.

Details on more direct fiscal support measures are not yet fully clear, but the authorities have hinted at an increase in the deficit in 2025 as measures to support the property sector and consumption may be stepped up.

Fiscal and growth prospects remain central to the evolution of China’s ‘A+’ sovereign rating, which Fitch put on negative outlook in April. A rising debt-to-GDP ratio could trigger further negative rating action, it added.

Fibre2Fashion News Desk (DS)