China's Economic Recovery Masking Financial Risks, Fitch Saysby
GDP growth pickup being fueled by record expansion in credit
Fitch questions China's commitment to reform after loan surge
Global investors have cheered the recent signs of economic pickup in China. Andrew Colquhoun is unimpressed.
Colquhoun, the head of Asia Pacific sovereigns at Fitch Ratings, sees the growth spurt, fueled by a resurgence in borrowing, threatening to wreak havoc on the financial system.
“Whether we call it stabilization or not, I am not sure,” Colquhoun said in an interview in New York. “From a credit perspective, we’d be more comfortable with China slowing more than it is. We are getting less confident in the government’s commitment to structural reforms.”
While global equity and commodity markets have rallied on signs that a surge in lending is helping stabilize the economy, the borrowing binge is adding to an already unsustainable debt level, according to Colquhoun. Eventually, the very thing that has been driving the recovery could end up derailing it, he said.
Standard & Poor’s and Moody’s Investors Service cut China’s long-term credit rating outlook to negative last month, citing the country’s surging debt burden and concern that the government won’t be able to implement reforms. Fitch affirmed China’s credit rating at A+, the fifth highest rating, in November, with a stable outlook. That is one grade lower than Moody’s and S&P.
China’s new credit increased a record 4.6 trillion yuan ($712 billion) in the first quarter, surpassing the level of 2009 during the depths of the global financial crisis. Total debt from companies, governments and households was 247 percent of gross domestic product last year, up from 164 percent in 2008, according to data compiled by Bloomberg.
Instead of focusing on reducing debt levels, Chinese policy makers choose to open up the lending tap whenever the economy slows, Colquhoun said. Such a stop-and-go policy weakens the credibility of President Xi Jinping’s administration as a reformer, he said. Gross domestic product rose 6.7 percent in the first quarter from a year earlier, in line with the government’s growth target of 6.5 percent to 7 percent for the full year.
“It’s difficult to achieve both objectives” of reaching a 6.5 percent growth target and carrying out reforms, including slashing debt and reducing excessive production capacity, said Colquhoun. “Given the twists and turns in the management of the policy over the last year, I am no longer sure which objective has higher weight.”