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THE head of Fitch Ratings’ Asia-Pacific sovereign debt unit cautioned it’s “not inconceivable” that Chinese banks’ bad debt ratio may reach 30 percent, which would in turn be “negative” for China’s sovereign rating.
A 30-percent sour loan ratio for Chinese lenders would “likely be negative” for China’s sovereign rating, Andrew Colquhoun, head of Fitch’s Asia-Pacific sovereign group, warned at a conference call yesterday.
The ratings agency downgraded China’s long-term local currency outlook to negative from stable and affirmed the rating at AA- on Tuesday.
A negative outlook means that Fitch may cut its ratings on China in the medium term. Still, “AA-” is a high investment grade sovereign rating with expectations of a very low default risk.
Fitch’s warning is the loudest among the three major global ratings agencies as it was concerned over a possible rise in bad loans in China. Fitch’s outlook cut on China is in contrast to sovereign ratings upgrades by Moody’s and Standard & Poor’s last year.
Fitch quoted a rapid credit growth, hidden sources of credit and the overall huge size of the banking sector as the main reasons to wave the red flag.
Banks in China lent a record 18 trillion yuan (US$2.8 trillion) in credit in 2009 and 2010, triggering concerns that bad loans could rebound.
Fitch said yesterday China’s new official loans may top 8 trillion yuan this year, alongside an off-balance sheet credit of 2 trillion yuan to 3 trillion yuan.
The official non-performing loan ratio of Chinese banks dropped to 1.2 percent at the end of 2010 from 24 percent in 2002.
Fitch said “a more conservative classification” of loans to local government’s financing vehicles would already have taken the NPL ratio closer to 6 percent, exhausting the banks’ own loss-absorption capacity. – Shanghai Daily