RPT-Fitch Affirms China's FC IDR at 'A+'; Downgrades LC IDR to 'A+'
April 9 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed China's Long-Term Foreign Currency Issuer Default Rating (IDR) at 'A+' and downgraded the Long-Term Local Currency IDR to 'A+' from 'AA-'. The Outlook is Stable. The Short-Term Foreign Currency IDR has been affirmed at 'F1' and the Country Ceiling at 'A+'.
Key Rating Drivers
The affirmation of the FC IDR reflects the following key rating factors:
-The FC IDR is supported by the strength of China's foreign currency sovereign balance sheet underpinned by official foreign reserves worth USD3,387bn at end-2012, dwarfing sovereign foreign currency-denominated debt of USD34bn. The risk of payment stress on FC-denominated liabilities over the forecast period to 2014 is remote.
-China's growth since the re-launch of market-based economic reform in 1992 has been globally as well as domestically transformative. However, the investment-led growth model faces tightening constraints as the share of investment in GDP approaches the level of domestic savings. The process of rebalancing the economy towards consumption could lead to the economy's performance becoming more volatile.
-Some underlying structural weaknesses weigh on China's ratings. Average income at USD5,988 in 2012 and the overall level of development remain well below 'A' medians despite China's phenomenal growth. Standards of governance lag 'A' range norms according to the World Bank's assessment framework.
-China has experienced a smooth leadership transition, despite low governance scorings, pointing to the continuation of basic political stability.
The downgrade of China's Local Currency sovereign rating reflects the following key rating factors:
-Risks over China's financial stability have grown. Credit has grown significantly faster than GDP since 2009. China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012. The stock of bank credit to the private sector was worth 135.7% of GDP at end-2012, the third-highest of any Fitch-rated emerging market. Fitch believes total credit in the economy including various forms of "shadow banking" activity may have reached 198% of GDP at end-2012, up from 125% at end-2008. Only 55% of new social financing took the form of bank lending in the 12 months to February 2013, down from 76% in 2009. The proliferation of other forms of credit beyond bank lending is a source of growing risk from a financial stability perspective.
-Fitch's analysis suggests the indebtedness of local governments (LG) rose again in 2012. Fitch estimates LG debt reached RMB12.85trn at end-2012 or 25.1% of GDP, up from 23.4% of GDP at end-2011. Fitch estimates China's general government debt at 49.2% of GDP at end-2012, not far below the 'A' range median of 51.2%. China's public indebtedness is therefore not a weakness, but neither is it a strength relative to rated peers, underscoring the case for equalising the Foreign Currency and Local Currency ratings.
-Fitch believes Chinese LGs likely have significant additional contingent liabilities arising from debts of LG-linked corporates. Moreover, the classification of lending between corporate and LG sectors has been opaque. Lack of transparency over the indebtedness of LGs is a shortcoming for China relative to peers.
-China's fiscal revenue base is lower (at around 23% of GDP) against the 2012 'A' range median (33%) and more volatile than the median for the 'A' range. -China has a less favourable record on inflation management than 'A' range peers.
The main factors that could lead to positive action, individually or collectively, are:
-Growing evidence that the economy had rebalanced smoothly towards a more sustainable consumption-led growth path.
-The case for future positive rating action would be strengthened in the event that China improved the transparency of its official data, in particular the indebtedness of local governments.
The main factors that could lead to negative action, individually or collectively, are:
-A significant and sustained slowdown in growth leading to a rise in unemployment and, in particular, to problems in the financial system or social tensions.
-Financial instability on a scale that has an impact on the real economy or leads to a requirement for substantial sovereign assistance to the banking sector.
-Sharply increased social and political tensions that lead Fitch to reassess China's basic political stability.
-Recognising China's emergence onto the world economic stage, the ratings assume the continuation of an open global trade and financial system.
-The ratings assume there is no significant deterioration of geopolitical risk, for example a conflict between China and Japan or an outbreak of war on the Korean peninsula.
-Given China's large holdings of US Treasury securities in its official foreign reserves, the ratings are based on the assumption that the ratings of the United States of America 'AAA'/Negative remain in the upper end of the 'AA' range in the event of a downgrade. This assumption should not be read as prejudging any future rating action on the United States.