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AMERICA is not the only giant to suffer from an impertinent ratings agency. A few days before Standard & Poor’s warned that it might cut the American government’s credit rating (see article), Fitch said it might do the same to China. Its government’s yuan debt is now rated AA-, just three notches below the safest mark. No agency has cut China’s rating since 1999, according to Bloomberg.
Fitch is not worried by the sovereign debt on China’s books, which amounted to just 21.5% of GDP at the end of 2010. It is, however, troubled by the potential cost of bailing out China’s banks, which are overlending against a backdrop of overpriced property. Only 1.1% of these loans had gone sour by the end of last year, according to China’s banking regulator. But Fitch thinks that ratio is already closer to 6%, on a less forgiving view of loans to the financing vehicles of local governments.
The authorities have tried to get a grip on this lending. But Fitch believes money is passing through less visible channels, such as China’s lightly regulated trust companies. Last week the central bank introduced a broader measure of “social financing”, which showed lending by banks and trust firms did slow in the first quarter, compared with a year earlier. But the bond market and loans between companies filled some of the gap.
Excessive lending is contributing to inflation, which rose to 5.4% in the year to March, prompting the central bank to raise the amount of money banks must keep in reserve to 20.5%, a record (see chart). Fitch worries that the fight against rising prices might inadvertently add to financial fragility. If the authorities have to slam on the brakes, the property market will falter, jeopardising loans to developers and builders. In Fitch’s worst-case scenario, a bank bail-out might cost 30% of GDP. That is a phenomenal figure. But it would still leave China’s public debt below that of Brazil, let alone India. Indeed, China is remarkably creditworthy for a country at its stage of development. The typical AA country is more than six times richer.
For an emerging economy, China has a respectable record against inflation. But its credibility is not enhanced by the antics of the National Development and Reform Commission (NDRC), the country’s planning body, which vies with the central bank for influence. According to the 21st Century Business Herald, a Chinese newspaper, NDRC officials have been telling foodmakers to avoid price rises by frying noodles in cheaper oil. Turning down the economic heat would be a better recipe.
via: Economist
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