Real estate constitutes about 30% of China’s GDP, making it the single biggest contributor to the world’s second-largest economy.

That makes it the “most important single sector of the global economy,” James McCormack, Fitch’s global head of sovereigns, told Bloomberg TV in a Thursday interview. 

“There’s a structural change underway; it is not going to be the growth driver of the Chinese economy the way it has been in the past,” he continued.

Yet China is unlikely to step in and provide “massive support to property developers,” McCormack predicted, given Beijing’s previous wish to lower debt in the real estate sector and reduce property’s overall importance to the economy. 

The decline of real estate was not “unintended,” McCormack believes, even though the “spillovers to the broader economy and confidence” probably weren’t expected by officials.

China’s property crisis is just one warning sign for the country’s economy, already struggling with stagnant consumption, high youth unemployment, and now potential liquidity issues in the financial sector.

Downgrading China’s debt

Weeks after Fitch Ratings knocked the sovereign debt of the U.S. from the premium level, McCormack suggested how the world’s second-largest economy could also get its downgrade. 

Fitch currently ranks China as A+, meaning it considers Chinese debt to be of “high credit quality.” The country has held that status since 2007, making it one of Fitch’s “most stable ratings,” McCormack said.

But if debt grows to dangerous levels in corporate and banking sectors it may become a “real [liability] for the government,” he said. If that prompts Beijing to step in, that may in turn push the rating agency to reconsider China’s rating, he suggested.

China’s “debt-to-GDP ratio is a little bit on the high side for a single ‘A’ credit,” McCormack said. China currently has a debt-to-GDP ratio of 281.5%, according to Bloomberg calculations—a record high.

When Fitch last affirmed its rating of Chinese debt in December, the agency cited “a sustained upward trajectory in government debt,” and “abrupt policy shifts” as factors that might lead to a downgrade.

Fellow rating agencies Moody’s and S&P both downgraded China in 2017, citing high levels of domestic debt. 

McCormack said that the government extending its balance sheet to support the economy was unlikely. “Recent evidence doesn’t suggest that would be the case,” he told Bloomberg. 

In fact, some economists are worried that Beijing is not spending too much money, but rather too little. China has largely avoided direct stimulus to boost its flagging economy, as officials resort to slashing interest rates and taxes instead of direct support to households. 

Wary of stimulus

Unlike the U.S., China’s economy is anything but strong.

China reported below-expectations growth in retail sales and manufacturing on Tuesday, following an 89% plunge in new loans in July compared with the previous month.

The country’s statistics bureau also said Tuesday that it would stop measuring youth unemployment, which hit a record 21.3% in June.

Home prices continued their decline in July—perhaps even worse than what official data suggests—putting pressure on China’s private property developers.

Yet Beijing is avoiding the use of stimulus to boost consumption and the economy, instead relying on tax cuts and other incentives for businesses to spend and invest. 

That’s starting to worry some prominent Chinese economists, who argue that Beijing needs to start giving money to households directly. Beijing needs to “use all reasonable, legally compliant, and economic channels to put money in residents’ pockets,” Cai Fang, an advisor to the central bank, wrote in an article Monday. Cai has previously called for over $550 billion in stimulus to Chinese households.

Still, Chinese officials are wary of direct stimulus. Party officials have previously warned about “welfarism,” instead wanting Chinese households to build wealth through work.