China Gets a Surprise Credit Downgrade

For much of 2011 and 2012, Fitch Ratings tended to be a little quieter and less controversial than its colleagues in the so-called “Big Three” credit ratings agencies. That has changed somewhat this year with some of Fitch’s moves, the latest of which being the first downgrade to a Chinese rating this century.

Though Fitch affirmed China’s Long Term Foreign Currency Issuer Default Rating (IDR) at the top,  'A+’ level, the agency downgraded the Long-Term Local Currency IDR to 'A+' from 'AA-'. It is the first downgrade of a Chinese rating since 1999. The reasoning is an increase of debt-related risk to China’s overall financial stability, according to Fitch’s release:
“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 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.”

Still, for China, the Fitch outlook is set at “stable.” Granted, the agency noted this could all change with a steep and surprising downturn or, perhaps more poignantly, increased volatility among neighbors in the region, whether directly or indirectly involving China.

“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,” Fitch noted.

-Brian Shappell, CBA, NACM staff writer

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