Beijing's level of debt casts doubt on credit rating
Beijing faces a bumpy road ahead as it tries to wean itself from relying too heavily on investment to drive the economy, and as debt accumulated during the lending binge after the global financial crisis starts to put pressure on government loan books.
Andrew Colquhoun (pictured), head of Asia-Pacific sovereigns for Fitch Ratings, said from a sovereign credit perspective, debt migration from the rest of the economy onto the government balance sheet was raising concerns.
Apart from central government debt, contingent liabilities such as local government debt, asset management company debt, and Ministry of Railway debt all add to the mainland's loan book pressure.
Fitch placed an 'A+' on the mainland's long-term foreign currency with a stable outlook, and a 'AA-' on the long-term local currency outlook, with a negative outlook, even though its sovereign credit rating looks strong on paper.
Beijing's investment-led growth model has been deemed unsustainable, and even though it has been trying to rebalance its economic structure, the percentage of investment compared to gross domestic product stood at around 50 per cent last year, up from 35 per cent in 2000, according to Fitch. However, consumption as a percentage of overall GDP has fallen during the same period.
Colquhoun said he was less concerned with the mainland's near-term economic outlook than other commentators despite data from last month indicating a weakening.
Beijing said over the weekend that it would cut the reserve requirement ratio to release more liquidity into the economy after economic data for April showed industrial production growth slumping to a three-year low, with trade also tapering off.
Fitch said it expected 8 per cent GDP growth this year, and recent data appeared to be in line with its estimates.
'I think that China is experiencing a policy-led slowdown in growth which was implemented by the authorities in response to the inflation pressure that emerged last year, and it seems to me well within the parameters of normal policy management,' Colquhoun said.
So long as China did not experience any 'adverse impact on the labour market', it was unlikely to drastically shift its stable monetary policy approach set at the beginning of the year, Fitch said.
'I don't expect China to hit a hard landing,' Colquhoun said. 'I think the authorities will be happy to see growth slow somewhat to take the steam out of inflation.'