Fitch DOWNGRADES CHINA DEBT!!!

Fitch DOWNGRADES CHINA DEBT!!!

Posted in the China Forum

OVERTHROW the CCP PIGS

Port Moody, Canada

#1 Apr 9, 2013
Fitch downgrades China – just a little local difficulty?

Apr 9, 2013 4:58pm by Rob Minto

Fitch w China downgrade...citing structural challenges, weak governance. Can't remember last time that's happened.. about 4 hours ago via Twitter for [email protected] bremmer
ian bremmer

That’s how Ian Bremmer of Eurasia Group (and an FT columnist) reacted to news that Fitch Ratings lowered China from AA- to A+ on Tuesday. There were plenty of other worried and puzzled reactions. But how great a worry is it really?

Bill Fischer, professor at Swiss business school IMD wrote:

“Underlying structural weaknesses” leads Fitch to downgrade China’s credit rating from AA- to A+ http://t.co/euIC5td0vk via @FT #imd_prc about 5 hours ago via Tweet [email protected] l_fischer
bill_fischer

A few things to note. This is the local currency rating – that means renminbi-denominated debt. When we talk of a sovereign credit rating, we normally refer to the foreign currency rating – which often means the ability of a country to repay its dollar debts.

Any sovereign that has control over its money supply can print more money – as quantitative easing in the US, UK and Japan has shown. And that money could theoretically be used to settle debts.

It’s harder is when a country – Greece, say – can’t just quantitatively ease the problem away. However, it’s a pretty drastic measure which countries are reluctant to use, even if not doing so results in default. Russia’s default in 1998 was on ruble debt, not dollar debt.

...
OVERTHROW the CCP PIGS

Port Moody, Canada

#2 Apr 9, 2013
...
There are other measures countries can try – raising taxes is one, as well as other financing tools in the local financial markets.

So overall, many sovereigns have higher local currency ratings than foreign currency ones, and many of those with equal ratings are in the eurozone (where the distinction breaks down somewhat).

But back to China. Fitch’s downgrade puts China’s local debt in line with foreign debt. And it’s clear why: as Fitch points out, China’s foreign debt rating is “underpinned by official foreign reserves worth $3.3tn at end-2012, dwarfing sovereign foreign currency-denominated debt of $34bn. The risk of payment stress on FC-denominated liabilities over the forecast period to 2014 is remote”.

However, China’s local debt is a growing problem. From Fitch’s release (our emphasis):

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.

In other words, although local debt is normally easier to deal with, in China’s case it’s a worry, and a possible bubble.

As Andrew Colquhoun of Fitch put it to beyondbrics:“When you include local debt, China’s debt to GDP ratio is in line with other sovereigns in the A-range. But there is a broader debt problem. Credit is still growing faster than GDP, and Fitch believes banks have been encouraged to ‘extend and pretend’”.

So Fitch has brought down China’s local credit rating in the face of structural challenges and rebalancing. The question is what happens when the credit dries up – but this is a question that has been asked for a while. Fitch has had China’s local currency debt on negative for two years.

Given that this is still an A+ country in both local and foreign debt, sounding the alarm is either a little late, or a bit of an over-reaction.

Related reading:
Fitch downgrades China’s credit rating, FT
OVERTHROW the CCP PIGS

Port Moody, Canada

#3 Apr 9, 2013
The CCP dictatorship has order the fake banks in China to "extend and pretend"?

China is probably already in a zero-growth pattern or even a recession, and the country is running on DEBT!

Sounds like the US in 2007, doesn't it, with Bush running up the bills like crazy?

But, those smart enough to short China now will make a KILLING!

Those dumb enough to leave savings in Chinese banks or real estate leases will likely be the ones WIPED OUT!
OVERTHROW the CCP PIGS

Port Moody, Canada

#4 Apr 9, 2013
http://drezner.foreignpolicy.com/posts/2013/0...

Will China's financial sector go boom? What about China's government?
Posted By Daniel W. Drezner Tuesday, April 9, 2013 - 1:16 PM Share
An out-of-control shadow banking system that's been barely reformed. A housing sector that's been booming but seems primed for a bust. And despite a recent election that seemed to make it clear who was in charge, gridlock and short-term thinking appear to be hobbling the country's political elite.

I'm talking, of course, about ... China. Well, not me so much as Fitch Ratings, which has turned just a bit bearish on Chinese debt. Why did Fitch downgrade their debt?

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 USD 5,988 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....
OVERTHROW the CCP PIGS

Port Moody, Canada

#5 Apr 9, 2013
...
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....

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.

Well, to be fair, despite daily headlines to the contrary, the chance of war breaking out on the Korean peninsula still seems pretty remote. Still, the Financial Times puts this downgrade in context:

China has faced concerns over debt levels since 2009 when state-owned banks unleashed a surge of loans to power the economy through the global financial crisis. The credit wave succeeded in keeping Chinese growth on track, but it led to bubbly housing prices and also saddled local governments with mountains of loans that they are still struggling to repay.

Beijing has spent the past three years trying to manage these problems. It has waged a long campaign to rein in the real estate sector, raising mortgage downpayments and barring people from buying second homes in the hottest markets. Partly as a result, China recorded its lowest annual growth rate for a decade last year.

Reuters tells a similar tale on China's shadow banking system.

China's banks are feeding unwanted assets into the country's "shadow banking system" on an unprecedented scale, reinforcing suspicions that bank balance sheets reflect only a fraction of the actual credit risk lurking in the financial system....

But the key question is no longer how much risk banks are carrying. Rather, it's how many risky loans have been shifted to the lightly regulated shadow banking institutions - mainly trust companies, brokerages and insurance companies.

The risk to the overall financial system is not clear, because of insufficient data about the quality of credit in the shadow banking sector.
OVERTHROW the CCP PIGS

Port Moody, Canada

#6 Apr 9, 2013
...
But as Martin Wolf notes in his column, as China enters "middle income trap" territory, there are significant problems with such reforms:

First, if expected growth falls from over 10 to, say, 6 per cent, the needed rate of investment in productive capital will collapse: under a constant incremental capital output ratio the fall would be from 50 per cent to, say, 30 per cent of GDP. If swift, such a decline would cause a depression, all on its own.

Second, a big jump in credit has gone together with reliance on real estate and other investments with falling marginal returns. Partly for this reason, the decline in growth is likely to mean a rise in bad debts, not least on the investments made on the assumption that past growth would continue. The fragility of the financial system could increase very sharply, not least in the rapidly expanding “shadow banking” sector.

Third, since there is little reason to expect a decline in the household savings rate, sustaining the envisaged rise in consumption, relative to investment, demands a matching shift in incomes towards households and away from corporations, including state enterprises. This can happen: the growing labour shortage and a move towards higher interest rates might deliver it smoothly. But, even so, there is also a clear risk that the resulting decline in profits would accelerate a collapse in investment.

I'd add only two things at this point. First, as far as I'm concerned, one of the great mysteries in comparative political economy is why it's so bloody difficult for countries like Germany, Japan, and China to change their growth models. High-saving export-oriented economies don't change their ways all that much. To be fair, neither do low-saving, high import countries like the United States. This could be a "varieties of capitalism" story, but that seems ... inadequate as an explanation.

Second, it's worth remembering that the conventional wisdom about China's government was that annual growth below eight percent a year would spell trouble for the government. The implicit contract over the past three decades was that the Chinese Communist Party would supply the growth in return for political quiescence. The end of high growth would imply that this social contract is in trouble.

Except that China's growth has been below that rate for the last two years and running. During that time, Beijing has weathered one major political scandal, a raft of minor political scandals, and a leadership transition without a hint of regime collapse. So while China's economy does seem to merit greater attention, I'm not sure that China's political economy will trigger the kinds of instability that have been predicted for so long.

What do you think?
OCCUPY TIANNANMEN

Surrey, Canada

#7 Apr 9, 2013
"China experienced the second-fastest expansion of credit in real terms, behind only Qatar, between end-2009 and end-June 2012. "

WOW!

The CCP is propping up its dying regime on CREDIT!
CHINA SPRING

Surrey, Canada

#8 Apr 9, 2013
Boy!

A HUMILIATING DOWNGRADE and all the supporters of this dying regime can do is HIDE???!!!!

Talk about WEAK!

Holy fuhk, the CCP is more DEAD than I thought!
CHINA SPRING

Port Moody, Canada

#9 Apr 10, 2013
The UNITED KINGDOM is far more STABLE ans a better credit risk than the DYING Chinese Communist Party dictatorship!

It's a FACT!
It is Amazing

Kuala Lumpur, Malaysia

#10 Apr 10, 2013
CHINA SPRING wrote:
The UNITED KINGDOM is far more STABLE ans a better credit risk than the DYING Chinese Communist Party dictatorship!
It's a FACT!
They are!

From what I read United Kingdom is TECHNICALLY like Japan BANKRUPTED!

Who care what Fitch is saying when China is today lending more MONEY to other nations than the IMF, World Bank, etc.

And the MOST PROFITABLE banks and the TOP five banks in the world today is Chinese and in China!
CHINA SPRING

Surrey, Canada

#11 Apr 11, 2013
^Well don't read that Xinhua crap, then! Obviously you are left looking like a total idiot again!

The UNITED KINGDOM is far more STABLE and a better credit risk than the DYING Chinese Communist Party dictatorship!

It's a FACT!

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