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.