China’s credit rating

8 May

The international agency Fitch has downgraded China’s credit rating from AA- to A+ after fears over the country’s growing debt.

With total credit in china reaching 198% of GDP last year up form 125% in 2008. This huge increase in debt is a result of the 2008 global financial crisis where Chinese banks increased their loans to try and ride out the credit crunch experienced in the West, however as we are now seeing this has caused a housing bubble and a very high amount of debt at a local level which local governments are struggling to pay back.

Andrew Colquhoun, head of Asia sovereign ratings at Fitch, has claimed that sovereign resources may have to be used to resolve this growing problem.

However the company Fitch has rated China lower than some of its rivals. Moodys which has maintained China’s credit rating of Aa3 has cut its outlook from positive to stable, claiming that China’s rating will probably not change in the next 18 months.

It confirmed China’s credit rating of Aa3 due to large international reserves (of around $3.5 trillion) and strong economic growth, but like Fitch, it too is worried about the amount of local government debt accumulating.

However this is still very high for an emerging market!

The Chinese government sought to address this problem by restricting credit and increasing mortgage down payments, however analysts are concerned that this has not had the desired effect as credit coming in to the country is still as high as ever increasing by 23% last year alone. Economist Shen Jianguang told the financial times that this looks set to increase as the US and Japan are printing more money and thus more foreign currencies will be flooding into China.

Despite the governments efforts to control the banking sector, an article in the economist has stated that the problem lies with the shadow banking sector (non-bank financial intermediaries that provide many of the services offered by commercial banks) where some of the sectors are so new that no one really has regulatory authority over them and consequently it is very hard for the Chinese government to restrict the credit supply from these new sources.

Although this influx of credit has not caused a huge increase in inflation, analysts worry that it will in the near future. This coupled with the recent stagnation in China’s economic growth (although still extremely high) is clearly worrying not only the Chinese government but also, investors abroad who nervously await each quarters’ economic growth figures.

The new Chinese government clearly need to enforce tighter restrictions on credit, but more importantly need to reign in local government debt, however this may highlight the disparities and growing tension between the local government and the central government. Although Mr Xi’s new laws cutting down on lavish spending by local government should help to address this problem, to maintain stability something more drastic clearly needs to be done!

Sources:

http://www.reuters.com/article/2013/04/16/us-china-moodys-ratings-idUSBRE93F05I20130416

http://www.ft.com/cms/s/0/591224c8-a0ff-11e2-bae1-00144feabdc0.html#axzz2RfZf2czc

http://www.ibtimes.com/why-fitch-ratings-cut-chinas-credit-rating-total-debt-may-be-198-gdp-foreign-exchange-reserves-climb#

http://www.economist.com/news/china/21576134-chinese-credit-rises-chinas-credit-rating-falls-shadows-lengthen

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2 Responses to “China’s credit rating”

  1. na8g10 May 8, 2013 at 2:33 pm #

    This is huge news and with Fitch being one of the ‘big three’ credit rating agencies, you’d expect this to have quite a big impact on China economically. Despite being the smallest of the big three this will have quite a few effects. Originally, some of the debt that the local and central government were building up could be argued to have been ‘good debt’, in a sense that the growth that will result from the borrowing will more than offset the cost. But with China’s economy now slowing down, relatively speaking compared to other countries, they are struggling. However, as one of the articles points out, only a handful of highly rated advanced industrial economies have a stronger international investment position compared to China. So despite the downgrade, relatively speaking they are still fairly well off. This was also not very unexpected, China’s economy has been struggling for the last few months now and this would have dampened any effect this decrease in the credit rating bought with it. China is also a country that doesn’t mind making big reforms, so you’d expect them to try and handle this problem as quickly as possible.

  2. os2g10 May 16, 2013 at 8:37 am #

    What I find interesting about the article is the fact the different ratings agencies offered different outlooks on China’s credit future.I think this gives weight to the scale of the complexity of Credit within China.

    Whilst agreeing with the article in the fact that credit levels of 198% of GDP are very high, China also operates its economy with a huge trading surplus which allows it to accumulate high levels of reserves. For the time that this is the case I think Moody’s and S&P, the two largest ratings agencies will continue to see China as a stable economy.

    Also the state of the world economy may have something to do with the favorable ratings offered by Moody’s, with current problems in European financial markets, the agency may not want to cause unnecessary uncertainty within the Chinese financial markets as the two together could have strong negative implications on the rest of the world.

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