China & Fitch, the double crisis

Asian stock markets reacted with little interest to the Fitch rating agency's announcement that it had changed its outlook for Chinese debt to negative. Moreover, the judgment was expected, given that last December Moody's had made a similar decision, downgrading the “outlook” on the second most important economy on the planet. Fitch therefore kept the rating on Chinese sovereign debt unchanged, which remained at A+ (the third highest category, Italy is worse off with BBB) but lowered the outlook from stable to “negative”.

Beyond the formulas, Fitch's decision reignites public attention on the health of the Chinese economy: Beijing's public finances find themselves between the hammer of slower growth and the anvil of growing debt. Fitch expects China's explicit central and local government debt to rise to 61.3% of gross domestic product (GDP) this year, well above 56.1% in 2023, and 38.5% in 2019. economy will slow to 4.5% in 2024 against 5.2% last year, while the International Monetary Fund forecasts that China's GDP will grow by 4.6% this year.

The prolonged real estate recession has weighed on public debt and growth. According to Dan Wang, chief economist at Hang Seng Bank China, “Fitch's review reflected fundamental concern about China's fiscal health and its ability to drive long-term growth.” In fact, the great Asian power is suffering from weak domestic demand and poor private investment, consequences of the real estate recession. And the state must make up for these shortcomings by pumping money into the economy. However, Beijing plans to bring growth back to 5% this year.

What impact does China's slowdown and rising debt have on the rest of the world?

From a political point of view, it is possible that a more vulnerable China could try to mend relations with the United States, which has imposed limits on Chinese exports to their market. But there is also an opposite thesis, which imagines a more aggressive China. Republican Congressman Mike Gallagher, chairman of the US House Select Committee on China, said domestic problems were making Chinese leader Xi Jinping “less predictable” and could lead him to “do something very stupid” such as of Taiwan.

As for the impact on the planet's economy, considering that China is responsible for over a third of global growth, any kind of deceleration will be felt beyond its borders. Hundreds of large global businesses derive much of their revenues from China's vast consumer market and will be hit by lower household spending. The ripple effects will then be felt by the thousands of suppliers and employees around the world who work with these companies. Furthermore, the lower demand for raw materials and semi-finished products affects supplier countries. Already many capitals of South-East Asia, such as those of South Korea and Thailand, have justified the slowdown in 2023 of their economies with the decline in Chinese demand, while “large exporters such as Australia, Brazil and several 'Africa will be the most affected by this situation,' said Roland Rajah, director of the Indo-Pacific Development Center at the Lowy Institute in Sydney.

Furthermore, as part of the major Silk Road project, more than 150 countries have received Chinese money and technology to build roads, airports, seaports and bridges. According to Rajah, Chinese commitment to these projects could begin to wane if economic problems persist at home. “Now Chinese companies and banks will not have the same financial largesse to spend abroad.”

The impression is that we are witnessing a domino effect that, starting from China, radiates to the rest of the world, slowing down some activities, also touching Italy with its luxury companies. Another effect concerns the decline in tourism: the collapse of the real estate market makes homeowners less wealthy than before and therefore even foreign travel will struggle to reach pre-pandemic levels, hitting both tourism-dependent nations in the south -East Asia such as Thailand, and European ones such as Italy.

But there is at least one silver lining: China's slowdown will reduce global oil prices and the prices of goods shipped around the world will fall. An advantage for consumers.