Fitch warns it may downgrade China's yuan debt rating

Yuan notes
Image caption Chinese banks loaned record sums of money in recent years to boost economic growth

Credit ratings agency Fitch has warned that it may cut China's yuan debt rating on concerns of rising defaults.

Fitch's current rating for China's yuan-denominated debt stands at AA-.

The warning comes after Fitch revised its outlook on China's local currency debt from "stable" to "negative" in April this year.

There have been growing concerns of bad loans in China after the nation's banks lent record sums of money in the last two years.

Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch Ratings was quoted by news agency AFP as saying that there was a "better than even chance" of a downgrade.

"Bank asset quality... will deteriorate quite meaningfully in the medium term," Mr Colquhoun added.

When contacted by the BBC, Fitch's Leslie Tan confirmed the comments.

Double whammy?

Chinese banks lent record amounts of money in 2009 and 2010, issuing a combined 17.5tn yuan ($2.7tn; £1.9tn) of new loans.

While that helped China maintain its pace of growth through the global financial crisis, analysts said it had also raised the prospect of default.

"There are concerns that given the volume of loans that have gone out there will be a substantial amount of non performing assets'' Peter Hoflich of The Asian banker told the BBC.

At the same time, growing concerns of a slowdown in the global economy have also added to the worries about China's growth.

There have been fears that the US could slip back into a recession and growth in Europe might slow in the wake of the ongoing debt crisis.

That is likely to have an impact on demand for Chinese goods, which analysts said was not good for the banks which have loaned money to the country's manufacturers.

"When the exports go down, defaults are expected to rise," Mr Hoflich said.

Government debt

It is not only default by businesses that has the ratings agencies and analysts worried.

Last month, Moody's warned that bad debts held by local governments in China were a far bigger problem than previously estimated.

In its report Moody's said the debt burden of local governments could be 3.5tn yuan more than the auditors' estimate of 8.5tn yuan.

"The Chinese banking system's economic non-performing loans could reach between 8% and 12% of total loans," Moody's had warned.

While concerns of bad debt have been growing, analysts said authorities are well placed to help the banks if they need support.

"No other government in the world has the kind of fire power like China has, when it comes to supporting the banking industry," The Asian Banker's Mr Hoflich said.

He explained that the government in Beijing could tap into its vast foreign exchange reserves to ensure liquidity in the country's banking system.

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