Fitch Downgrades Ratings Outlook for China's Six Biggest State Banks to Negative

TMTPost -- Fitch Ratings downgraded the credit outlook of a group of China’s biggest state banks, citing concerns over the government’s ability to support the banking sector.

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While affirming the credit rating of six state-backed banks, Fitch, one of the Big Three credit rating agencies in the world, has cut the outlook for their credit rating to Negative from Stable, according to a report published on Tuesday. The latest revision affected ratings outlook of Industrial & Commercial Bank of China (ICBC), China Construction Bank (CCB), Agricultural Bank of China (ABC), Bank of China (BOC), Bank of Communications (BOCOM) and Postal Savings Bank of China (PSBC).

Fitch report sugested the rapid growing size of China’s banking system plays a key role in limiting the amount of support the central government could give to top lenders. Total assets of the Chinese banking system has grown to RMB417 trillion (US$57.6 trillion) by the end of 2023, equivalent to about 33% of the country’s gross domestic product (GDP) that year, the report said. It added the six big state banks of China make up over 40% of assets of the sector,while the combined assets of 20 domestic systemically important banks (D-SIBs) account for nearly 70% of the total. "The large size of the banking sector as well as the number of D-SIBs constrain the government's ability to support the banking sector," it said. However, the report stressed that there is a "very high probability" that the government would continue to support the lenders "in a timely manner in the event of stress," even though the chances of the state offering the same level of extraordinary support would be limited.

Fitch's outlook revision of these major banks came a week after the credit rating agency took the similar action on China’s sovereign credit outlook. Fitch announced last Wednesday it affirmed China's Long-Term Foreign-Currency Issuer Default Rating (IDR) at A+ but downgraded the Outlook on the IDR to Negative from Stable. The Outlook revision reflects increasing risks to China's public finance outlook as the country contends with more uncertain economic prospects amid a transition away from property-reliant growth to what the government views as a more sustainable growth model, Fitch said. Fitch noted wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective. It expected that fiscal policy is increasingly likely to play an important role in supporting growth in the coming years which could keep debt on a steady upward trend, and contingent liability risks may also be rising, as lower nominal growth exacerbates challenges to managing high economy-wide leverage.

It is regrettable to see the decision by Fitch Ratings to downgrade China's sovereign credit rating outlook, according to a statement of the Ministry of Finance last Wednesday. Fitch's rating system has failed to effectively reflect the positive effects of China's fiscal policies on boosting economic growth and stabilizing the macro leverage ratio in a forward-looking manner, the ministry said in a statement. The Chinese government has stay committed to multiple goals of support for economic development, prevention from fiscal risks and fiscal sustainability, scientifically and rationally set and maintained the deficit rate at a reasonable level given development of conditions with coordination of various demands and possibilities, the ministry said. "In the long run, maintaining a moderate deficit and making good use of the valuable debt funds is conducive to expanding domestic demand, supporting economic growth, and ultimately helping maintain sound sovereign credit," it said.

It is encouraging that China’s GDP has grown by 5.2% in the year 2023, contributing more than 30% to the global economy, while the growth target of around 5% this year China set is in line with realistic conditions and needs for development, signaling determination and confidence in high-quality development, the ministry noted. The long-term positive momentum of the Chinese economy has not changed, and the Chinese government's ability and determination to maintain sound sovereign credit also remained unchanged, it stressed.

As to the local government debt that Fitch expressed seriouos concerns, the ministry said the risks have been mitigated as the country has taken active and prudent steps to resolve them. Payments of principal local government statutory debt and interest on this debt are guaranteed, while the size of hidden debt is gradually declining. "The work on resolving China's local government debt is progressing in an orderly fashion, and the risks are generally under control," it said.