Fitch: Rebalancing Central for China's Sovereign Ratings
15 Oct 2013 6:01 AM (EDT)
Link to Fitch Ratings' Report: China: Rebalancing and the Ratings
Fitch Ratings-Hong Kong-15 October 2013: The key structural vulnerability facing China's credit profile is the unsustainability of the investment-driven growth model. The longer investment and leverage remain on an unsustainable path, the greater the risk to the sovereign credit profile and ratings, Fitch says in a report published today.
China's Foreign-Currency Issuer Default Rating (IDR) has risen to 'A+'/Stable as of October 2013 from 'A-'/Stable when the rating was first assigned in December 1997. The upgrades reflect strengthening in the balance sheet and the economy's astonishing growth. However, momentum has stalled since the upgrade to 'A+' from 'A' in November 2007 because structural vulnerabilities have come to the fore.
Capital formation rose to account for 48.1% of GDP in 2012 - unprecedented for any large emerging market. If investment continues to grow faster than GDP, it would soon exceed domestic savings (50.8% of GDP in 2012) - and China would sink into a trade deficit, dependent on capital inflows to fund growth. Fitch believes the authorities are determined to avoid such an outcome.
Investment and debt are closely connected and Fitch believes China has a debt problem to match its extraordinarily high investment rate. The stock of debt in China's economy has surged to around 200% of GDP at end-2012 from 129% at end-2008 when the authorities unleashed a credit-fuelled stimulus. The agency believes no economy can operate indefinitely with a rising leverage ratio - another reason why growth is on an unsustainable path.
There has been no progress in rebalancing the economy away from investment towards consumption, year to date. Investment contributed 4.1 percentage points (pp) of China's 7.6% growth in H113, against 3.4pp from consumption. Credit continues to grow faster than GDP: the flow of new "total social financing" was up 30.6% year-on-year in H113 while nominal GDP rose by 8.8%. Fitch believes China faces a process of structural economic adjustment - which could be bumpy. Moreover, some of the costs of fixing China's debt problem are likely to fall on the sovereign.
China has a busy policy-making calendar through to the National People's Congress in March 2014. Evidence that the authorities are abandoning rebalancing and reform in favour of "more of the same" growth would be negative for the sovereign ratings.
Conversely, a lengthening track record of rebalancing without economic or financial instability could lay the foundations for positive rating action in recognition of China's other credit strengths. The case for positive action would be strengthened if China's legacy debt problem from the 2008-2012 credit surge were tackled convincingly.
The report "China: Rebalancing and its Ratings" is available at www.fitchratings.com or by clicking on the link above.
Fitch on China: "There Has Been No Progress in Rebalancing the Economy Away From Investment Towards Consumption, Year to Date."
10/16/2013 02:41:00 AM
Source: Fitch Ratings (emphasis mine):
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