Source: www.asiaecon.org |
CHINESE LENDING AT ALARMING RATES
China's government announced its two-year fiscal stimulus package back in November 2008 which consisted of about 13 percent of forecast GDP for 2009. However, credit-ratings firm Fitch Ratings points out the risks associated with the economic climate and the government's stimulus plan, acknowledging that the country did not take every angle into consideration.
According to Fitch, the central government’s debt was about 21.9 percent of GDP by December 2008. The “relatively low” debt burden allowed the government to take on a large stimulus program to ease out of the recession, but Fitch pointed out that local governments, who borrowed indirectly “through state enterprises” were not taken into account, and thus the debt is actually a lot larger than reported.
Local governments were responsible for “supporting economic growth” and many launched major projects, which were state-sponsored. These projects are liabilities that were not included in the country’s debt. Fitch also considers Chinese banks a possible sovereign liability, since they are “active in the current stimulus program with massive lending increases since November 2008.”
In May, Fitch continued to report that China’s banks were showing signs of “asset-quality deterioration” due to the surge of lending to fund the stimulus projects. As of May 2009, new loans totaled 5.17 trillion yuan ($757.5 billion), which surpassed all loans made in 2008, according to the Wall Street Journal. The lending is currently about $1,000 billion.
“Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments ultimately will be willing or able to bear.”
Michael Pettis from Beijing University predicts that China’s debt may be as high as 50-70 percent of GDP once everything is taken into account, or as he said, “counted correctly.”
The surge of credit brings about much risk to the country’s economic well-being. Fitch says, “Chinese lenders have been downgrading more ‘special mention loans’” which are potentially weak loans or assets presenting an unwarranted credit risk. Those loans are “bad debt” that will most likely default. Chinese banks have been increasing provisions for unimpaired loans. Charlene Chu, a senior director at Fitch Ratings China is sure that “banks themselves see greater losses down the line in loans that are currently performing.” He also stresses that since China’s banks tend to roll over loans and sometimes extend their maturities, it is difficult to assess the lenders’ asset quality, which makes it difficult to spot any impending credit crisis.
China’s domestic demand and exports remain weak. As reported by the Wall Street Journal, “Corporate loans in China are rising despite the fall in company profits.” The likelihood of default is rising as corporate borrowers borrow more and simultaneously face declining profits. So far, profits have decreased at a 35 percent rate, while corporate debt has risen 30 percent.
Source: www.asiaecon.org |