Fitch on Chinese Debt Myths

August 11, 2011


It’s been a year since writing the seminal piece “China : The Emperor Wears No Clothes.” Since then, so much more has come to light and most have begun to wake up from their slumber, but there are still many myth’s still alive. China’s strong fiscal position is one such myth. A year ago I wrote :

Chinese debt levels are listed at just over 20% of GDP, but if one were to add in local debt,  total debt would closer to 70-80% of GDP, versus the United States’ near 90% of GDP says Victor Shih, professor at Northwestern University. This operates under the grand assumption that the published figures are believable, and with a long history of accounting gimmicks that stem back to the Asian crisis of 1997, corruption rampant, there is the possibility these are conservative figures. The real question what is priced into the market. The US debt situation is well known, while the consensus on the Chinese government’s fiscal health is much different.

Fitch’s Charlene Chu has been one analyst to watch. In their latest report, they drop a bombshell.

  • Perhaps most strikingly, more than 55% of new financing is expected to come from outside bank lending, close to triple the level of 2006. This
  • Fitch estimates that, by the end of 2011, financing could be equal to 185 per cent of GDP. And, they note, the rapid growth of this ratio is similar to that which preceded financial crises in many other countries:

Ah, where have we year this before, perhaps here where I note note that credit growth has been the single best predictor of financial crises.  Fitch has been at the forefront of exposing China, documenting the hidden debt at the local level, wealth management products sold to consumers then lent to developers, and burgeoning shadow banking system’s opaque Trust system. Many simply to turned to the black market for funds to speculate in real estate, including actual open outcry black market auctions and loan sharks.  There are also the equivalent of subprime’s Special Purpose Vehicles in China, called Local Government Financing Vehicles.

Despite measures to tighten lending standards, total credit continues to grow as the shadow banking system picks up the slack from the formal lending system. This is why the notion that China’s central government has an iron fist control over the economy and their people is a myth that is poised to shatter.

Further Reading :

Predicting Banking Crises : Fitch’s Macro-Prudential Risk Indicator

Fitch – Growth of Leverage in China Still Outpacing GDP Growth_2011

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