FITCH: China's debt explosion threatens financial stability

China's huge debt levels will weigh on growth over the next five years and could threaten the country's financial stability unless policymakers rein in credit, Fitch has warned.

The ratings agency said a "remarkable build-up in leverage across China's economy" since the 2008 financial crisis meant Beijing's ability to meet ambitious annual growth targets of 6.5pc to 7pc between 2016 and 2020 looked "extremely challenging".

While China's public debt ratio stood at 55pc of gross domestic product (GDP) at the end of last year, total credit in the world's second largest economy climbed to almost 200pc of GDP in 2015, from 115pc in 2008, according to official estimates.

Fitch said the "true figure" was likely to be closer to 250pc. It expects this to climb to 260pc of GDP by the end of this year as total debt continues to grow faster than the economy.

"High and rising leverage in the economy is a mounting source of systemic vulnerability," Fitch analysts wrote in a note.

"The longer the economy's indebtedness goes on rising, the greater the difficulty of unwinding it, and the higher the risk of a shock to economic and financial stability."

Fitch's warning came just days after the International Monetary Fund warned that negative growth surprises in China could trigger a global market rout .

However, Fitch said a "hard landing" in China, where growth slows to near-zero, was very unlikely.

Analysts said they believed China had the tools to engineer a successful transition towards consumption-led growth and away from investment and exports.

It noted that China's financial system was largely funded by retail deposits, while many banks and borrowers were "either state-owned or heavily state-influenced".

REUTERS

"These factors combine to suggest that the kind of collapse of confidence among creditors that might precipitate a financial crisis is unlikely in China," Fitch said.

The ratings agency expects Chinese growth to slow to 6.2pc this year, from 6.9pc in 2015. Growth in 2017 is expected to ease further, to 6pc.

While Fitch currently has a "stable" outlook on China's A+ rating, it warned that a "sharp and sustained rise in general government indebtedness would be negative".

Separate survey data showed activity in China's service sector strengthened last month.

The Caixin services purchasing managers' index (PMI), rose to 52.2 in March, from 51.2 in February.

Economists said the moderate expansion suggested China's economy was improving on the back of Beijing's supportive measures.

This article was written by Szu Ping Chan from The Daily Telegraph and was legally licensed through the NewsCred publisher network.

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