China’s debt rating has been cut for the first time in 12 years, due to a record jump in lending and increasing risks that bad loans may overwhelm the country’s banks. Earlier this week, Fitch Ratings downgraded the outlook for China's Long-Term Local Currency Issuer Default Rating from Stable to Negative.
The country's debt rating has been affirmed at 'AA-', four notches below its top classification. This is despite the fact that it has the world's largest stock of foreign currency reserves, estimated at $2.8 trillion at the end of 2010.
“Fitch has documented a proliferation of off-balance sheet and other more or less informal channels through which credit is being extended to the economy,” says Andrew Colquhoun, head of Fitch’s Asia-Pacific sovereign unit. “This gives rise to concerns that the effectiveness of monetary policy may be decreasing.
The agency forecasts an increase in bad debts in China over the next three years, following rapid the country’s growth in recent years.
A systemic banking crisis in China is a “remote possibility” in the next few years, says Bank of America-Merrill Lynch economists.
Since October, China has raised interest rates four times to fight inflation.
Loans to companies and households in China have increased to about 140 percent of gross domestic product last year, up from 111 percent in 2008, reports Fitch. The rise is tied to property lending and local-government financing, it said.
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