Fitch Ratings has downgraded the outlook on China's sovereign credit rating from stable to negative, citing the government's expected increase in debt as it seeks to move the economy out of a real estate-driven slowdown. 

Fitch Ratings: Efforts of China to Reduce Housing Dependence Might Hurt Government Budgets 

On Wednesday, Fitch warned that China's efforts to reduce housing dependence are straining the nation's public finances. 

"Wide fiscal deficits and rising government debt in recent years have eroded fiscal buffers from a ratings perspective," the New York-based rating agency said in a statement.

"Fitch believes 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," it added.

China quickly responded, claiming Fitch neglected to appreciate fiscal policy's role in boosting growth and stabilizing debt. China's 10-year national bond rate remained at 2.29%, while the currency was stable.

Bloomberg reported that China's Ministry of Finance defended its fiscal policy as supportive of growth, arguing that the government can manage its debt ratios well and save policy room to deal with future risks and challenges.

The ministry said in a statement that it was disappointed with "Fitch's cut to China's credit outlook," adding that the company's rating methods failed "to effectively reflect, in a forward-looking manner, the positive effects of the fiscal policy of 'moderately increasing the strength, improving the quality and efficiency' on promoting economic growth and further stabilising the macro leverage ratio."

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China's Public Debt Has Skyrocketed in Past Decades

China's public debt has reportedly increased dramatically in the past decades as the government put cash into the economy to sustain world-leading growth rates. 

With a real-estate collapse threatening to slow output and alarm foreign investors, the government has announced additional stimulus measures, including subsidies for individuals and companies that want to replace appliances and other equipment.

Nevertheless, Andrew Freris, chief executive officer of Ecognosis Advisory Co., said China was not in danger of a debt crisis like other developing countries since it borrows in its own currency. He said domestic matters are the only things they should be worried about since the government owns one-third of the banking system.

Fitch has maintained China's credit rating at A+, citing the nation's "large and diversified economy, still solid GDP growth prospects relative to peers, integral role in global goods trade, robust external finances, and reserve currency status of the yuan."

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