MonitorFears growing about Chinese credit bubble
Fitch downgrade of China's local-currency rating amid the rapid rise in local government debt points to increased risk in financial system
On Tuesday, credit agency Fitch downgraded China's local-currency rating from AA-minus to A-plus.
That demotes the creditworthiness of China to the level of Japan, where total gross debt now exceeds 450 per cent of gross domestic product and the central bank is busy printing money in a desperate attempt to revitalise the economy.
"Risks over China's financial stability have grown," Fitch warned in its statement, pointing out that domestic credit has ballooned from 125 per cent of GDP in 2008 to an estimated 198 per cent at the end of last year.
Even more disturbing, almost half of the recent growth in credit has taken place in China's loosely regulated and largely opaque shadow banking market. This rapid expansion has been driven largely by corporate and local government borrowers.
According to a report published last week by Australian investment bank Macquarie, China's non-financial corporate debt stood at 108 per cent of GDP at the end of 2011. That's well above the 90 per cent level at which the International Monetary Fund warns company debt "becomes a drag on growth", and on the same sort of level as corporate debt in Britain or France (see first chart).