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Fitch downgrades China in credit build-up warning

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Fitch Ratings has cut China’s local currency debt rating after warning that recovery in the world’s second largest economy is being threatened by a build-up in credit.

The Chinese long-term local currency issuer default rating has been downgraded from AA- to A+, with the agency highlighting the growing risks to the country’s financial stability. Its foreign currency debt rating was maintained at A+.

China is second only to Qatar in terms of credit growth, with credit expanding significantly faster than GDP since 2009. The stock of bank credit to the Chinese private sector was worth 135.7 per cent of GDP at end of last year, which is the third highest of any emerging market rated by Fitch.

The agency adds: “Fitch believes total credit in the economy including various forms of ‘shadow banking’ activity may have reached 198 per cent of GDP at end-2012, up from 125 per cent at end-2008.

“Only 55 per cent of new social financing took the form of bank lending in the 12 months to February 2013, down from 76 per cent in 2009. The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective.”

The risks linked to local government debt were also highlighted in the downgrade.

Fitch also warns that the indebtedness of China’s local governments appears to have increased again in 2012 and estimates it to have reached Rmb12.85trn by the end of the year – equivalent to 25.1 per cent of GDP.

Furthermore, the agency says Chinese local governments are likely to face “significant additional contingent liabilities” from the debts of corporate entities linked to them.

“The classification of lending between corporate and [local government] sectors has been opaque,” Fitch says. “Lack of transparency over the indebtedness of [local governments] is a shortcoming for China relative to peers.”

Fitch’s move is the first time since 1999 that China’s sovereign credit rating has been downgraded by a major international agency.

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