Credit rating agency Fitch Ratings has revised its credit outlook on China from Stable to Negative, citing growing debt-related concerns as the world's second-largest economy faces increasing uncertainty in public finances. Despite the negative outlook, Fitch has maintained China's existing credit rating at A+. The move comes as China grapples with a debt-to-GDP ratio of 287%.

Yahoo Finance's Akiko Fujita breaks down the details, providing insights into factors contributing to China's rising debt levels.

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Editor's note: This article was written by Angel Smith

Video Transcript

SEANA SMITH: Well, more bad news for the world's second largest economy. Fitch cutting its outlook on China's credit rating to negative from stable. Saying that the government could pile on debt as the economy faces increasing uncertainty.

Joining us now to explain what this means for China and for the US and you, the investor, we want to bring in "Yahoo Finance's" Akiko Fujita. Akiko?

AKIKO FUJITA: Yeah. Good morning to you, Seana. We didn't necessarily see a significant reaction in the markets partly because we have heard this story before. It was just in December that Moody's downgraded the outlook for China's credit rating.

Fitch, now, keeping China's credit rating at 8 plus, which is the third highest category. But it downgraded the outlook to negative, specifically, citing risks to the country's public finances.

Now, this is all about this double whammy we've been talking about with China. Decelerating growth and then growing debt stemming from the collapse in the country's property sector, and then government measures that were spent on anti-pandemic measures.

China's debt to GDP ratio climbed to a new record back in 2023, 287% is what we're looking at. Compare that to 97% in the US, and, certainly, points to just where the health is in China right now. And that, by the way, is according to data from the National Institute for Finance and Development.

Now, if you look specifically at debt held by central and local governments, you see it on the chart right there, in roughly four years, it's gone from 77% to roughly 111%. And there's a number of factors behind that. There's the transition largely in the public finance model, which was driven by local governments that largely leaned on land development.

And with the downturn in the property sector that we've been talking about, that development has plunged leading to unsustainable levels of debt. Now, Fitch notes in this report, the central government will now be shouldering a lot of that load or more of that load.

And that's the big concern for China moving forward. Now, China's finance ministry naturally denouncing the Fitch downgrade overnight, saying, that China's deficit is, in their words, at moderate and reasonable levels. And risks are under control.

The question is, what's next, now, that we've gotten the downgrade on the outlook? Well, ING's chief economist, Lynn Song says, Chinese corporate credit could be next to be downgraded. And he expects credit ratings or ratings agencies to eventually downgrade the actual credit rating, largely, because fiscal spending is expected to only accelerate as China tries to stabilize the economy there.

Now, last time we saw a wave of credit downgrades was back in 2017 for Moody's and S&P, 2013. When you look at Fitch, there are questions, guys, though, about the appetite for stimulus.

Now, there's so much comparisons that are made between what's happening now and back in 2008 in the midst of the financial crisis. China, at that time, put forward a stimulus of $585 billion. The thinking is this time, the appetite isn't there for that, largely, because that 2008 stimulus was about development and property development.

That's largely the reason why China is in the position that it is today with the incredible amount of debt they have taken on. By the way, IMF, now, estimating growth in China to be at 4.6%. So that points to slower growth with this debt picture, and China, potentially, having to take on more debt in order to stimulate the economy from where it is right now.

SEANA SMITH: It was a very challenging time for China, at least, it looks like in the near term. Akiko, great stuff. Thanks so much for breaking that down for us.