Special Report: China: Stimulus Hangover?

The Chinese authorities' massive economic stimulus programme helped the economy escape the global recession, but public debt has risen sharply while the pace of credit growth may be storing up trouble for the future, Fitch says in a Special Report titled "China: Stimulus Hangover?"

Looking at official information on local government indebtedness that has recently become available, Fitch estimates China's general government debt may have risen to levels not far off the median for an 'A' range sovereign -- somewhere between 32% and 47% of GDP for end-2010, against the projected 'A' range median of 40%. But as the report highlights, the true extent of government liability remains uncertain, with about 20 percentage points of the debt owed by local-government investment companies whose relationship with the rest of government is opaque.

Bank credit to the Chinese private sector soared 32% in 2009, taking the stock to 148% of GDP, against a median for all emerging markets of just 41%. The pace of credit growth was sufficient to take China to the highest risk category in Fitch's June 2010 global banking system macro-prudential risk assessment. The sovereign has substantial resources to meet any emerging problems in the sector, such as deterioration in asset quality, and the authorities have tightened credit policy in 2010; but recent experience globally has shown how problems in banking systems can spill over to affect sovereign creditworthiness.

Much of the credit has gone to fund public capital spending, taking the share of investment in GDP to a historically-high 47% in 2009 from 44% in 2008, leading Fitch to question whether resources have been deployed efficiently. Evidence of large-scale inefficiencies in capital spending could compel a reduction in Fitch's growth forecasts for China of 8.6% in 2011 and 8.7% in 2012. Meanwhile, Fitch expects the authorities will continue to pursue the goal of rebalancing China's economy towards stronger private consumption by fostering higher wage growth more than through CNY appreciation, but the process is a slow one, and international tensions over conduct of economic policies seem likely to persist.

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