HONG KONG (Reuters) - China's red-hot property market is a concern for its sovereign credit rating because of the threat of worsening asset quality in the banking system, Fitch Ratings said on Tuesday.
"China is the most obvious area of concern," James McCormack, managing director of Asia Pacific sovereign ratings at Fitch, said in a Reuters chat room forum.
Chinese property and stock prices have surged this year, helped by very loose monetary policy and aggressive bank lending.
"The China property issue raises some concerns with respect to asset quality in the banks. The banking system is a sovereign rating weakness. Clearly banks in any country with a property bubble would be affected, but banks in China are, as noted, already a weakness."
Chinese banks extended a total of 8.67 trillion yuan ($1.2 trillion) in new loans in the first nine months, 75 percent more than all of 2008, triggering concern about potential new bad loans ahead.
Liu Mingkang, chairman of the country's banking regulator, warned last month about the risks of such strong credit growth and told banks to lend at a more "reasonable" pace.
McCormack expected the Philippines' budget deficits to overshoot this year and next, and that means the country's debt levels "will deviate further from the rating peer group."
But Fitch had "some tolerance for fiscal deteriorations in 2009 and 2010 due to the cyclical nature of the downturn" and there was no immediate impact on the ratings, he said.
The Philippines looks certain to exceed its budget deficit target for 2009 of 250 billion pesos ($5.3 billion) or 3.2 percent of GDP. It aims to reduce that to 2.8 percent of GDP in 2010, or 233.4 billion pesos, though the bond market expects it to breach that target.
Government 10-year benchmark bond yields has risen by more than 50 basis points so far this year and Fitch rates the Philippines at two rungs below investment grade.
On Malaysia., McCormack does not expect any immediate change in its ratings despite proposed cuts in budget deficits as its government debt levels were still high relative to its rating peer group.
Malaysia unveiled a budget deficit target to 5.6 percent of GDP in 2010 from 7.4 percent in 2009, its highest level in more than 20 years last month.
McCormack said New Zealand's ratings from an international investment position perspective "was deeply negative" as the country was a large net external debtor and a stronger fiscal position would help its rating outlook.
(Reporting by Eric Burroughs and Saikat Chatterjee; Editing by Kazunori Takada)
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