Fitch: Rebalancing Central for China's Sovereign Ratings


Link to Fitch Ratings' Report: China: Rebalancing and theRatingsHONG KONG, October 15 (Fitch) The key structural vulnerabilityfacing China's credit profile is the unsustainability of the investment-drivengrowth model. The longer investment and leverage remain on an unsustainablepath, the greater the risk to the sovereign credit profile and ratings, Fitch saysin a report published today.China's Foreign-Currency Issuer Default Rating (IDR) has risento 'A+'/Stable as of October 2013 from 'A-'/Stable when the rating was firstassigned in December 1997. The upgrades reflect strengthening in the balance sheetand the economy's astonishing growth. However, momentum has stalled since theupgrade to 'A+' from 'A' in November 2007 because structural vulnerabilities havecome to the fore.Capital formation rose to account for 48.1% of GDP in 2012 -unprecedented for any large emerging market. If investment continues to growfaster than GDP, it would soon exceed domestic savings (50.8% of GDP in 2012) - andChina would sink into a trade deficit, dependent on capital inflows to fundgrowth. Fitch believes the authorities are determined to avoid such anoutcome.Investment and debt are closely connected and Fitch believesChina has a debt problem to match its extraordinarily high investment rate. Thestock of debt in China's economy has surged to around 200% of GDP at end-2012from 129% at end-2008 when the authorities unleashed a credit-fuelledstimulus. The agency believes no economy can operate indefinitely with a risingleverage ratio - another reason why growth is on an unsustainable path.There has been no progress in rebalancing the economy away frominvestment towards consumption, year to date. Investment contributed 4.1percentage points (pp) of China's 7.6% growth in H113, against 3.4pp fromconsumption. Credit continues to grow faster than GDP: the flow of new "total socialfinancing" was up 30.6% year-on-year in H113 while nominal GDP rose by 8.8%.Fitch believes China faces a process of structural economic adjustment - whichcould be bumpy. Moreover, some of the costs of fixing China's debt problem arelikely to fall on the sovereign.China has a busy policy-making calendar through to the NationalPeople's Congress in March 2014. Evidence that the authorities areabandoning rebalancing and reform in favour of "more of the same" growth would benegative for the sovereign ratings. Conversely, a lengthening track record of rebalancing withouteconomic or financial instability could lay the foundations for positiverating action in recognition of China's other credit strengths. The case forpositive action would be strengthened if China's legacy debt problem from the2008-2012 credit surge were tackled convincingly.The report "China: Rebalancing and its Ratings" is available at or by clicking on the link above.Contact: Andrew ColquhounSenior Director+852 2263 9938Fitch Ratings2801, Tower Two, Lippo Centre89 Queensway, Hong KongArt WooDirector+852 2263 9925Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935,Email: information is available at FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS ANDDISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THISLINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION,RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLEON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS,CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'SCODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATEFIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLEFROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHERPERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES.DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN ANEU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUERON THE FITCH WEBSITE.

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