‘But expectations for the economy’s growth potential in the medium term are shifting lower as the scale of the restructuring challenge becomes clearer,” it said.
Global capital markets have seen big corrections over the last few days over worrying signs that the Chinese economy has slowed down markedly and is unlikely to continue as the world’s growth engine.
China is estimated to account for much of the world’s demand for commodities such as metals. However, the country has developed into an export oriented economy where local people do not like to spend, but prefer to save. This has helped the country’s economy grow in double digits in recent decades.
The Chinese stock market has lost over 30% of its value in recent days.
Fitch expects China’s trend growth rate to decline further as the country adjusts and rebalances.
“One scenario of gradual rebalancing could see the growth rate decline gradually to about 5% on average over 2016-2020. The declining productivity of investment, the cost of supporting China’s high and still-rising debt burden, and emerging pressure on the Chinese yuan and foreign reserves all point to tightening constraints on China’s investment-led growth model,” it said.
Fitch also expects more volatility around the new normal of slower growth, both in real economic activity and in financial markets.
“The authorities have experimented with more volatility in interbank funding markets, real estate prices, and recently equities and the currency. The major exception remains credit, where explicit default remains rare. Continued reluctance to permit explicit default could inhibit the re-allocation of the economy’s resources into new, more productive forms of activity, weighing further on medium-term growth prospects,” it said.