Fitch: Indebtedness in China Still Climbing
18 Sep 2013 1:18 AM (EDT)
Link to Fitch Ratings' Report: Chinese Banks: Indebtedness Continues to Rise, With No Deleveraging in Sight
Fitch Ratings-Beijing/Hong Kong-18 September 2013: Fitch Ratings says leverage continues to rise rapidly in China's economy and talk of deleveraging, or contracting credit, is misplaced.
Certain channels of credit are shrinking, but overall extension remains high, with the stock of credit on pace to rise 20% in 2013, Fitch says in a Special Report published today.
The agency believes that China's economic growth and financial stability can be maintained over the near- to medium-term, but the longer that credit growth outpaces GDP expansion, the greater the longer-term challenges. Even in a positive case - in which credit growth slows by 2pp annually to 12% while nominal GDP growth holds at 11% - credit/GDP would be pushed to near 250% by end-2017 (2008: 130%).
China's financial sector has some unique features that make such high leverage more manageable than elsewhere. Yet no financial system can sustain rising leverage indefinitely. Eventually, swelling debt burdens will constrain economic activity as greater resources are directed into debt-servicing and further investment exacerbates overcapacity.
Interest owed by borrowers has risen to an estimated 12.5% of GDP in 2013 from 7% in 2008. By end-2017, this will rise to 16% of GDP in a positive case of stable interest rates and GDP growth, while more realistic scenarios point to 19%-22%. Such high interest and debt may ultimately overwhelm borrowers, while at the same time placing a practical limit on the extent of interest rate liberalisation.
The report, "China Banks - Indebtedness Continues to Rise, With No Deleveraging in Sight", is available on www.fitchratings.com or by clicking on the link above.
**Related: Fitch's Charlene Chu: China Will Have Replicated the Entire U.S. Commercial Banking System in Five Years (Video)