Fitch Ratings Ltd cut China’s long-term local-currency debt rating, citing rising risks to the country’s financial stability given the lack of transparency in the increased borrowing of local governments.
Fitch lowered its assessment by one step to “A+,” the fifth-highest grade, the London-based company said in an e-mailed statement on Tuesday. It estimates total credit in China’s economy, including various forms of so-called shadow banking, may have reached 198 percent of GDP at the end of last year, up from 125 percent four years earlier.
The ratio of credit to GDP “is not stabilizing any time soon,” Charlene Chu (朱夏蓮), Beijing-based head of China financial institutions at Fitch, said in a teleconference yesterday. “We are getting increasingly worried about the fact that we could have an asset-quality problem in the financial sector. One sector of borrowers that we are concerned with is the local governments.”
The local governments may have had 12.85 trillion yuan (US$2.07 trillion) in debt at the end of last year, equal to about 25 percent of GDP, up from 23.4 percent at the end of 2011, Fitch said.
Chinese local governments “likely have significant additional contingent liabilities” arising from the debts of companies linked to them, Fitch said.
The ratings company said lending between such entities and business had been “opaque.”
Fitch affirmed China’s long-term foreign-currency debt rating at “A+” and said the outlook is stable. Local-currency ratings apply to both domestic debt and offshore yuan-denominated notes, the company said.
An upgrade is unlikely over the next couple of years because chances are the credit expansion will not unwind in that period, Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch in Hong Kong, said in the teleconference.