Fitch says China yuan debt downgrade likely

BEIJING: China faces a “better than even chance” of a another downgrade to its local currency debt rating due to rising defaults and high inflation following a credit binge, Fitch Ratings said yesterday.

Fitch also warned Chinese policymakers would face a dilemma over how to respond to another global downturn, with rising consumer prices and bad debts preventing a repeat of the massive stimulus launched nearly three years ago.

In April, Fitch downgraded its outlook on China's local currency rating from “stable” to “negative” on concerns over a huge rise in potentially destabilising debt since the end of 2008.

Fitch's rating for China's yuan-denominated debt currently stands at AA-, four notches below its top classification.
A clerk prepares stacks of yuan banknotes at a bank branch in Yiwu, in eastern China’s Zhejiang province. Fitch Ratings has warned that China faces a better than even chance of another downgrade to its local currency debt rating. — AP

“Bank asset quality ... will deteriorate quite meaningfully in the medium term,” Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings, told AFP on the sidelines of a seminar.

He warned Beijing might need to bail out the banks as more local governments and companies default, and forecast a better than even chance' for another downgrade to China's local currency debt rating within two years.

China launched a four trillion yuan (US$586bil) stimulus programme in late 2008 to combat the global crisis and ordered banks to open their credit valves to spur activity and prevent the economy sliding into recession. New lending nearly doubled to a record 9.6 trillion yuan and reached 7.95 trillion yuan in 2010, fuelling inflation and sending property prices soaring.

Fitch has estimated that the volume of new loans will reach 8 trillion yuan in 2011, but warns total new financing - which includes lending by non-bank financial institutions - could hit 18 trillion yuan.

China has been pulling on a variety of levers to restrict lending and tame inflation, which hit a three-year high of 6.5% in July, by raising interest rates and increasing the amount of money banks must keep in reserve.

But if the economic woes in the United States and Europe were to trigger another global recession and slump in trade, China would have limited policy options left to cushion the impact, Colquhoun said.

“The range of options has narrowed and if there were further stimulus that would lead to more problems coming through down the road,” he said.

Charlene Chu, head of Fitch's ratings of Chinese banks, also raised concerns about the already stretched' balance sheets of banks and their growing exposure to debt-laden local governments.

China's National Audit Office recently put the debt held by authorities at 10.7 trillion yuan as of the end of 2010, or about 27% of China's 2010 GDP. - AFP