Fitch downgrades China’s credit rating for the first time since 1999

[swissaustrian]

Fitch downgrades China’s credit rating

By Josh Noble in Hong Kong and Simon Rabinovitch in Beijing

China’s sovereign credit rating has been cut by a major international agency for the first time since 1999 with Fitch raising concerns on Tuesday that the country’s rising debt problems will require a government bailout.

Fitch downgraded China’s long-term local currency rating from AA- to A+, citing a number of “underlying structural weaknesses” in the Chinese economy, including low average incomes, lagging standards of governance, and a rapid expansion of credit.

The agency also warned of the growing risks from the rise of shadow banking, and said that total credit in China may have reached 198 per cent of gross domestic product by the end of last year, up from 125 per cent in 2008.

China has faced concerns over its debt levels since 2009 when state-owned banks unleashed a surge of loans to power the economy through the global financial crisis. The credit wave succeeded in keeping Chinese growth on track, but it led to bubbly housing prices and saddled local governments with mountains of loans that they are still struggling to repay.

“Ultimately we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet. We don’t yet know what form this will take – central bailouts of local governments or of banks, perhaps”, said Andrew Colquhoun, head of Asia sovereign ratings at Fitch.

“Our base case is for a gradual rebalancing and resolution of the debt problem, albeit with the sovereign likely picking up some of the tab.”

Fitch’s sovereign rating for China sits a notch below those of rival agencies Moody’s and Standard & Poor’s, which both upgraded their views on the economy in late 2010. The difference means that Moody’s and S&P believe China has a very strong ability to repay debts, while Fitch believes it is more susceptible to risks. Fitch already rated China’s foreign currency debt as A+, which Mr Colquhoun said was still “relatively high”, especially for an emerging market, underpinned by the country’s vast foreign reserves.

Beijing has spent the past three years trying to manage these problems. It has waged a long campaign to rein in the real estate sector, raising mortgage downpayments and barring people from buying second homes in the hottest markets. Partly as a result, China recorded its lowest annual growth rate for a decade last year.

To stop local governments from accumulating more debt, it has stamped out the previously widespread practice of their using financing vehicles to circumvent restrictions on borrowing from banks.

But some analysts are concerned that a big rise in financing through the shadow banking system, from corporate bonds to trust loans, has damped the effect of the government’s policy controls. Overall credit flows in the economy have remained extremely strong, rising 23 per cent last year, even as Beijing has capped the increase in formal bank lending.

In explaining its downgrade, Fitch also said that China had a “less favourable record on inflation management” than its A-rated peers, although data released on Tuesday showed a sharp drop in price rises in March.

First quarter Chinese growth, which will be released on April 13, is expected to have risen slightly to 8 per cent, according to a poll of economists conducted by Reuters.

Additional reporting by Alexandra Stevenson.

http://www.ft.com/intl/cms/s/0/591224c8-a0ff-11e2-bae1-00144feabdc0.html#axzz2Q44Ok8VL

 

[pmbug]

I'd have to think China would force the world's hand with respect to the global fiat ponzi before they got to the point of begging for a bailout.

 

[swissaustrian]

Part of the problem is that nobody knows the true state of China's economy.
Local municipalities and banks are in trouble as far as we Westerners can see.
The 20+% p.a. credit expansion is definitely a serious danger. The the classical Austrian economics credit bubble.

 

[ancona]

Chins has a Potemkin economy. Period. when you set about to construct entire cities, which by the way their common citizen could never afford to live in, and then you turn loose hundreds and hundreds of billions of dollar equivalents, then you look the other way as developers pave over your productive farmland to build mile after mile of condominiums and houses that all sit empty, you have the perfect recipe for disaster. Add to that the massive scale of resource hoarding being undertaken and the total misallocation of resources, then top it off with a badly cobbled together and inadequate infrastructure and the makings for collapse start to come in to focus. I have read story after story about the Chinese underground "banks", where groups of individuals pool money to loan out at huge rates of interest, and in the same stories I find many instances of people who thought they could just flip properties to pay the vig who ended up hanging from a bridge when they couldn't make the payments. China isn't in a bubble, they are in outer space now and when this thing comes apart, it will be epic.

All it takes is another recession/depression and the show is over. As fast as China rose, they will fall even faster.

 

[swissaustrian]

Some insight into the real state of China:

Yum Brands (YUM) March comp. sales down 13% for China unit

Says:
- Bird flu had negative effects on KFC unit.
- March same-store sales down 16% for KFC China.
- March same-store sales up 4% at China Pizza Hut.
Reaction details:

- Co. shares trade 2.6% lower after market.
http://ransquawk.com/headlines/yum-brands-yum-march-comp-sales-down-13-for-china-unit-10-04-2013

 

[ancona]

Everything seems to be tottering on the edge of a cliff. Watching the magic stock levitation every day is getting boring. The ultra thin volume on the Dow? Nothing to see here......move along. How about all of the regulatory blindness? How about DHS arming to the teeth? How about this massive push to disarm Americans? How about the widespread capital controls? Limits on cash transactions? How about being treated like a fucking criminal for asking to withdraw fifteen large from the bank in cash.....you know......just like it was when I put it in? How about the sudden and complete inability to purchase ammunition nearly everywhere?

Conspiracy theory? I don't think so, just some prudent observations. We're getting close to something ugly people, and it ain't in our imaginations, it's the real McCoy.

When the machine grinds to a halt, that is when the rubber meets the road. Just like all debt based systems, it needs constant increases in debt to survive. Period. If the flow of new debt stops, so does the party.

 

[pmbug]

... Watching the magic stock levitation every day is getting boring. ...

I watched a little bit of the Fox Business News channel yesterday. The anchors and "analysts" were just gaga over the stock markets reaching new highs and what a great time it was to invest.

I just sat in wonder how no one had a single brain cell for critical thinking there. How/why is the stock market reaching new highs? Does it make sense with the economy/earnings? No questions were asked nor answered. No hint of caution that there might be any irrationality going on.

 

[DSAbug]

IMHO...

Most of the news us westerners hear about China amounts to propaganda. Not from China, but from our own governments.

Anyone ever seen an empty mall in the USA? I sure have. I've also seen plenty of empty apartment buildings. We get part of the story, not all of it. So I don't want to assume China is this or that. What I see is China is buying a shit load of gold so I don't think they are dumb.