Fitch says China credit rating may be vulnerable to rethink

HONG KONG – Fitch Ratings said it may reconsider China’s A+ sovereign credit score, adding to the growing pessimism toward the nation’s financial markets.

If China extends its balance sheet to support the economy, “we might think again, because the debt-to-GDP ratio is a little bit on the high side for a single ‘A’ credit,” James McCormack, global head of sovereigns, told Bloomberg TV. “I wouldn’t say we’re expecting that, certainly recent evidence doesn’t suggest that would be the case,” but an increase in debt in the corporate and banking sector could become “real liabilities for the government.”

China’s A+ stable rating is one of Fitch’s longest-standing, in place since 2007, according to Mr McCormack. “The factors that would move it is if there were some kind of increase,” in contingent liabilities in other sectors, he said.

Mr McCormack’s comments come with Fitch’s downgrade of the United States’ top credit rating earlier this month still reverberating round global markets. That reignited a conversation about the US government’s fiscal path and its impact on Treasuries and helped play a role in the recent rise in yields.

Investors often rely on credit ratings when purchasing bonds, and their assessments can play a key role in determining how much interest a borrower pays to raise funds in capital markets.

Over in China, global investors are rapidly losing their patience in the country’s fragile recovery, with recent economic data from retail sales to home prices disappointing. Making the matter worse, one of country’s largest property developers, Country Garden, is at risk of default and a financial conglomerate, Zhongrong International Trust, missed payments on investment products, stoking fears about possible contagion.

A large injection of short-term cash to China’s financial system on Wednesday and central bank interest-rate cuts on Tuesday have failed to restore optimism. The onshore yuan is falling toward its weakest level in 16 years against the US dollar, and the MSCI China Index of stocks is poised to erase gains seen since a key policy meeting in late July.