Fitch Ratings warned yesterday it might downgrade China’s credit rating within two years because fast-growing loose credit might develop into systemic stress if left uncurbed.
Taiwanese banks could maintain a stable credit outlook in the face of a global economic downturn in the coming one or two years, thanks to improving asset qualities that may buffer loan loss, the international rating agency said.
“We expect a material deterioration in bank asset quality,” Fitch head of Asia Pacific sovereigns Andrew Colquhoun told Reuters.
If the problems in the banking system pan out as expected or are even worse over the next 12 to 24 months, that would take the rating downward, Colquhoun said.
Fitch, one of the world’s three biggest rating agencies, downgraded its outlook on China’s long-term local currency debt to negative from stable in April because of concerns about the country’s financial stability after a lending surge over the past three years.
China reported local government debt of 10.7 trillion yuan (US$1.68 trillion) as of the end of last year.
More than 347 billion yuan in urban construction investment bonds were issued in the five years to last year.
China’s new loans total 18 trillion yuan a year, equivalent to 55 percent of its GDP, Fitch Taiwan senior director Jonathan Lee (李信佳) said.
“Much of that amount is intended for public infrastructure spending that tends to be wasteful and unlikely to generate returns,” Lee told a media briefing.
Fitch’s China rating remains at a relatively high level of “AA minus,” the fourth-highest level.
That is because problems on the asset side of the balance sheet are easier to tame for authorities than problems on the funding side, Colquhoun said.
Lee echoed that view, saying that while liquidity was not an issue on the horizon, Fitch in June reaffirmed China’s risk score on the Macro-Prudential Index (MPI) at three, the highest on the spectrum.
That score suggests a 60 percent chance of Chinese banks undergoing systemic stress, Lee said.
By contrast, Taiwanese banks have a MPI reading of one, the lowest risk score available, Lee said.
“Taiwanese banks are relatively safe due to improving asset quality,” Lee said.
As of June 30, domestic lenders had an average bad loan ratio of below 0.5 percent and a coverage ratio near 200 percent, comfortably above regulatory requirements, Lee said, adding that was likely to continue over the next 12 to 24 months even if the world slipped into recession.
This story has been updated since it was first published.
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