Fitch cuts China yuan debt rating on local government

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 emailed statement Tuesday. It estimates total credit in China’s economy, including various forms of so-called shadow banking, may have reached 198 percent of gross domestic product at the end of 2012, up from 125 percent four years earlier.

The ratio of credit to GDP “is not stabilizing anytime soon,” Charlene Chu, Beijing-based head of China financial institutions at Fitch, said in a teleconference Wednesday. “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 ($2.1 trillion) in debt at the end of last year, equal to about 25 percent of GDP, up from 23.4 percent at end-2011, Fitch said. Former Finance Minister Xiang Huaicheng said April 6 that their combined debt may have exceeded 20 trillion yuan, almost double the figure given in a 2011 report by the National Audit Office.

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 won’t unwind in that period, Andrew Colquhoun, head of Asia-Pacific sovereigns at Fitch in Hong Kong, said on the teleconference.

The total borrowings of China’s central government and the nation’s provinces and cities may have exceeded 30 trillion yuan, Xiang, who served as finance minister from 1998 to 2003, said at the Boao Forum for Asia. Local governments had 10.7 trillion yuan of debt at the end of 2010, the auditor said in its report.

Billionaire investor George Soros said China has a “couple of years” to control risks from non-traditional financing, whose expansion has parallels with the cause of the global financial crisis. The growth of shadow banking has “some disturbing similarities with the subprime-mortgage market in the U.S.,” Soros said in a speech at the Boao Forum on April 8, adding the authorities “have both the skills and the resources to deflate an incipient bubble gradually.”

Aggregate financing, an indicator started by the central bank in 2011 to provide a broader gauge of funding than bank loans, more than doubled from a year earlier to a record 2.53 trillion yuan in January. The measure, which includes all loans as well as the proceeds of bond and equity sales, was 1.07 trillion yuan in February and data in the coming week is forecast to show financing totaled 1.80 trillion yuan in March, based on the median estimate in a Bloomberg survey.

“More attention should be paid to the pace of credit expansion through other channels, which is already alarmingly high,” Wang Qinwei, an economist at Capital Economics, wrote in a note Wednesday. “This concern was reflected in Tuesday’s move by Fitch to downgrade China’s long-term local-currency rating by one notch to ‘A+’.”

Bond-market history indicates that the effect of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s Investors Service suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. (Bloomberg)