(The following statement was released by the rating agency)
Link to Fitch Ratings' Report: China's Rebalancing Has Not Yet
HONG KONG/SINGAPORE, September 22 (Fitch) The rebalancing of
China's economy has
not so far involved a move away from dependency on rapid credit
Ratings believes that Chinese policymakers will continue to use
growth to meet near-term GDP targets, which will increase the
asset-quality problems in the financial system.
China's economy has rebalanced in two meaningful ways in recent
growth in the services sector has outpaced that of the
industrial sector since
late 2011, and has become a main economic driver. Second, on the
side, consumption has overtaken investment as the largest
contributor to real
GDP growth. These shifts, combined with the authorities'
intentions to reduce
over-capacity in the industrial sector, should facilitate an
slower - but more sustainable - growth over the medium term.
However, there remains little evidence that the economy is
rebalancing in a
third, perhaps more important, way - it remains heavily
dependent on credit
expansion to meet GDP growth targets.
Growth in outstanding renminbi bank loans rose to 13.0% yoy in
total social financing growth was up to 12.3%. A larger share of
new credit is
now going to the household sector, especially in the form of
Lending to households is generally safer than to the heavily
sector, given that mortgages face tight lending restrictions and
is comparatively low. However, there is still an issue - to the
extent that it
boosts real estate prices further, and corporates then use
prices to secure borrowing of their own.
Fitch has estimated in previous research that NPL rates could
already be as high
as 15%-21% for the financial system. In contrast, official data
showed the NPL
ratio for commercial banks was just 1.8% at end-1H16. There
seems a high
likelihood that banks' NPL ratios will continue rising over the
medium term, in
light of this discrepancy. There are already signs of stress,
most obviously in
the increased frequency with which banks are writing off or
such as those to asset-management companies.
We estimate that a one-off resolution of the debt problem would
in a capital shortfall of CNY7.4trn-13.6trn (USD1.1trn-2.1trn) -
around 11%-20% of GDP. The capital gap could rise by another
end-2018 if inefficient credit continues to rise at the same
rate as recent
years and no additional internal or external capital is raised.
It is unlikely that the credit gap will need to be addressed all
at once. Fitch
expects risks to be gradually managed through a combination of
writing-off, offloading and refinancing more loans.
Banks are likely to be central to any meaningful resolution of
overhang, and will probably need to absorb a significant portion
of any losses.
Mid-tier banks have the weakest buffers, and are the most
vulnerable to funding
stress. Their Viability Ratings are likely to come under the
most pressure if
fresh capital is not raised.
We think that sovereign resources will ultimately be needed to
China's debt overhang. Fitch estimates general government debt
to have reached
55% of GDP in 2015 (including around 34% of GDP in local
government debt), only
slightly above the 52% median among other 'A' rated sovereigns.
China's sovereign rating (A+/Stable) could emerge if general
indebtedness were to rise significantly above our current
estimates. An upfront
resolution of problem credit and recapitalisation of the
financial system is not
Fitch's base case, but it is one scenario that could lead to an
increase in general government debt.
An overview of China's credit risks is discussed in our
available at www.fitchratings.com or by clicking on the link
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The above article originally appeared as a post on the Fitch
Wire credit market
commentary page. The original article can be accessed at
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