Fitch: China Hard Landing Unlikely But Reform Skepticism Rising
Fitch Ratings' senior sovereign, banks and corporates analysts addressed the key questions on China most frequently asked by investors, in a Special Report published today. The report includes our views on the prospects for a hard landing, whether the yuan will be devalued, the likelihood of structural reforms, the nature of banking system risks, and the outlooks for ratings. Fitch believes strongly that China has the administrative and financial resources to avoid a disruptive slowdown to near-zero growth over the rating Outlook horizon of about two years - a factor underpinning the sovereign's 'A+' rating. However, high and rising leverage in the economy is a mounting source of systemic vulnerability, and has been the key reason why Fitch has not raised the sovereign into the 'AA' category. Moreover, the degree of clarity over the authorities' reform strategy remains low relative to the scale of risks. The risk of financial system stress will increase the longer credit expands faster than GDP, but it is not our base case that stress is imminent. The pace of credit growth means reported asset quality in the banking system could well deteriorate. But where and when NPL ratios will peak is less important for bank ratings than the evolution of banks' loss-absorption buffers. Buffers are stronger at state banks than at the mid-tier banks rated by Fitch, and these buffers have weakened faster among the mid-tier - owing to greater rapid credit expansion. Fitch thinks SOE restructuring is likely to be more gradual than the process in the late 1990s, with corporate indebtedness taking centre stage among investors' concerns. Asset swaps, mergers of entities or non-core subsidiaries being traded or swapped into other groups (including asset-management companies) is a much more likely outcome in the process of consolidating and reducing the overall number of SOEs, particularly at a national level. Mass privatisation is not a likely outcome.
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