Fitch May Downgrade China In 12-24 Months8 September, 2011, 15:58. Posted by Zarathustra
Tags: Economy, Fitch
This comes as no surprise. Reuters says Fitch may cut China’s local currency debt rating over the next 12 to 24 months, citing that the potential deterioration of bank assets as the key.
You should have noticed for a long time that I have absolutely no love for Chinese banks because of the existence of debts that no one know they exist. As the discussion between Carl Walter and Victor points out that the Chinese banking sector is now “just like old time”, delaying every reform towards free-market based sort of banking which failed spectacularly in the wake of the failure of Lehman Brothers. Of course, I do view this sort of blow-up as something pretty “normal” in a free-market capitalism, but China absolutely hates it, and believe that they can come up with something rather more stable. So here goes the debt which was used to prop up the economy after the financial crisis.
Even though the Chinese central government by itself has very little debt, they have much more debt if you consolidate all local government debts, and it will be more spectacular if you add the debt of state-owned enterprise to the total debt, much of which are bank loans. Ultimately, they are all central government obligations. So no one should be surprised if China deserves a downgrade at some point in future.
But at the end of the day, I am not sure if anyone should care about what any rating agencies say. It was pretty much like the US being downgraded: the impact of the US Treasury market was very positive, especially when you compare the US Treasury securities (AA+) with something like France government bond (AAA).