China's economic fragility persists despite signs of consumer strength

March 01, 2024 (MLN): Bright spots in China’s consumer sectors have driven a few positive rating actions among corporates in recent months but the overall economic environment remains challenging, and the proportion of ratings on Negative Outlook or Rating Watch Negative still outweighs their positive equivalents.

Travel and consumption patterns during the Chinese New Year holiday week highlight a demand shift towards service-oriented sectors in China, says Fitch Ratings.

In February, Fitch Ratings undertook more positive rating actions on Chinese issuers in the International Public Finance portfolio, driven by reassessments of several local government-related entities’ credit profiles under our updated Government-Related Entities Rating Criteria.

These largely reflected higher Support Score assessments.

The fragility of the economic recovery was signaled in February by the authorities’ stepped-up support for the economy and housing market via an unusually large 25bp reduction in the five-year loan prime rate, a benchmark interest rate that commercial banks use for long-term lending.

Fitch expects the rate cut to squeeze net profit at banks while delivering a minor boost to economic activity.

The rate cut reinforces a widening trend between the onshore and offshore spreads, which will keep Chinese issuers’ offshore borrowing at a low level.

Tepid external demand, slower manufacturing and disruptions from the Red Sea conflict are likely to slow cargo and container throughput growth for Chinese port operators.

Nevertheless, the operators will benefit from a cushioning effect from the volume via the New Western Land-Sea Corridor, Regional Comprehensive Economic Partnership, China-Europe Railway and sea-river transport and still see throughput growth this year.

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