Fitch cuts China yuan debt rating on local government loans

Fitch Ratings Ltd. cut China’s long-term local-currency debt rating, citing increasing risks to the country’s financial stability given the lack of transparency in the increased borrowing of local governments.

Fitch lowered the rating to A+, its fifth-highest level, from AA-, the fourth-highest, the London-based company said in an e-mailed statement today. The company estimates total credit in China’s economy, including various forms of so-called shadow banking, may have reached 198 percent of gross domestic product at the end of 2012, up from 125% at end-2008.

“Fitch believes Chinese LGs likely have significant additional contingent liabilities arising from debts of LG-linked corporates,” the company said, referring to local governments in China. “The classification of lending between corporate and LG sectors have been opaque. Lack of transparency over the indebtedness of LGs is a shortcoming for China relative to peers.”

Chinese local governments may have had 12.85 trillion yuan ($2.1 trillion) in debt at the end of last year, equal to about 25% of GDP, up from 23.4% at end-2011, Fitch said. Former Finance Minister Xiang Huaicheng said April 6 that the country’s local-government debt may have exceeded 20 trillion yuan, almost double the figure given in a 2011 report by the National Audit Office.

Fitch affirmed China’s long-term foreign currency debt rating at A+.

Local Debt

The combined debt of China’s central governments and the nation’s provinces and cities may currently be more than 30 trillion yuan, Xiang, who served as finance minister from 1998 to 2003, said at the Boao Forum for Asia. Local governments had 10.7 trillion yuan of debt at the end of 2010, the auditor said in its report.

Bond-market history indicates that the effect of sovereign ratings may be limited. Almost half the time, yields on government bonds fall when a rating action by S&P and Moody’s Investors Service suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s.

After S&P stripped France and the U.S. of AAA grades, interest rates paid by the countries to finance their deficits dropped rather than rose.

China’s benchmark 10-year government bond yield fell to 3.4732% today from this year’s high of 3.6143% on Jan. 29. Top-rated corporate debt with similar maturities pays 5.1122%, down 18 basis points this year.

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