Fitch downgrades outlook for local-currency default rating

PUBLISHED : Thursday, 14 April, 2011, 12:00am
UPDATED : Thursday, 14 April, 2011, 12:00am


Fitch Ratings has downgraded the mainland's local-currency issuer rating on concerns of elevated real-estate valuations and inflation.

The outlook for China's long-term local-currency issuer default rating has been revised from 'stable' to 'negative', Fitch said yesterday.

'The negative outlook reflects concerns over the scale of sovereign contingent liabilities and risk to macro-financial stability arising from the very rapid pace of bank lending in recent years, especially against the backdrop of rising real-estate valuations and inflation,' said Andrew Colquhoun, head of Fitch's Asia-Pacific sovereigns group.

Mainland banks approved a record 9.6 trillion yuan (HK$11.4 trillion) in loans in 2009, nearly double the minimum target of 5 trillion yuan, in a move to support the nation's economic stimulus package. Last year, lenders issued about 8 trillion yuan in credit, exceeding the quota of 7.5 trillion yuan.

The extent of credit creation in the world's fastest-growing economy is a major contributor to an inflation rate of more than 5 per cent likely to emerge in the data for March, along with exorbitant home-price increases that the central government is attempting to slow.

Private-sector credit, accounting for 111 per cent of the gross domestic product in 2008 and 140 per cent of GDP last year, has expanded rapidly - thanks to property-related lending as housing and real estate valuations reached new highs; as well as loans to local government financing vehicles with uncertain creditability.

'Fitch expects some sovereign support for the banking system will be required, although the timing and size are hard to predict,' Colquhoun said. The agency estimates a rise in the non-performing loan (NPL) ratios of lenders to between 15 and 30 per cent could require upwards of 10 to 30 per cent of GDP to support the banking system.

While the headline NPL ratio was just 1.1 per cent at the end of last year, a more conservative classification of lending to local government financing vehicles institutions would already take the figure closer to 6 per cent, nearly exhausting the agency's estimate of the banks' own loss-absorption capacity, according to Fitch.

China's long-term foreign-currency credit rating has been affirmed at A-plus with a stable outlook, underpinned by its more than US$2.8 trillion foreign reserves, the ratings agency said.

Lu Ting, an economist with Bank of America-Merrill Lynch, said a systemic banking crisis was a 'remote probability' in China in the next few years. 'Being cautious is one thing, exaggerating risks is quite another,' Lu said.

Fitch has been among the most pessimistic about China's banking system since last year. Ratings agency Standard & Poor's said in a report in July last year that credit risks were rising, but the delinquencies would be absorbed because of the banks' good operating profitability.

The 13 listed mainland banks reported a combined net profit of 665.9 billion yuan last year, with each experiencing net income growth of more than 20 per cent from 2009.

Extended credit

The amount, in yuan, mainland banks approved in loans in 2009, nearly double the minimum target: 9.6tr yuan