Fitch upgrades China's forex rating outlook

Source: AFP

Rating agency Fitch on Monday announced it has revised the outlook for China's A-minus long-term foreign currency rating to positive from stable. The decision is based on exceptionally strong external finances, Fitch said.

Despite the revision, the agency also warned the ratings remain constrained by domestic weakness, notably in the banking sector, and by fears over unsustainably rapid rates of credit and investment growth.

These problems, combined with expectations of an appreciation in the yuan are a continuing risk to an economy that is in danger of overheating.

China's A long-term local currency rating remains on a stable outlook, Fitch said.

China's official foreign currency reserves have been boosted by a continuing strong balance of payments and are likely to exceed $400 billion by year-end.

The figure is twice as large as China's gross external debt, and up from $286.4 billion at the end of 2002. Fitch said this level of reserves offers "a virtually unassailable liquidity cushion against external shocks."

China is now the world's third-largest creditor nation, with net external assets of nearly $360 billion and an international liquidity ratio of 1 000 percent, the highest of any Fitch-rated sovereign.

"These strengths, combined with good prospects for export growth and inward investment render China all but immune to external shocks and strongly support foreign currency creditworthiness," Fitch said.

However, these strengths are mitigated by concerns over the medium-term risks to macroeconomic and fiscal stability posed by the rapid pace of credit growth and the weakness of the banking sector.

"Fitch is concerned by current unsustainably rapid rates of credit and investment growth," the agency said.

Bank lending rose 24 percent in the first half year-on-year and domestic credit to the non-government sector has now reached 140 percent of gross domestic product, which is extremely high by international standards, it warned.

Although the country's central bank, the People's Bank of China, has taken measures to tighten monetary policy, Fitch believes these have yet to be reflected in slowing credit growth.

With further government response through monetary policy measures complicated by market expectations of an appreciation in the Chinese currency, the yuan, there are dangers of overheating pressures mounting that will require more abrupt action later on, it warned.

The credit boom is also raising concerns about a new generation of non-performing loans and their impact on future fiscal losses as government debt will have to rise in order to absorb bank losses.

Any sharp increase in new non-performing loans could threaten public debt sustainability over the medium to long term, Fitch said.