Fitch raises China’s ratings as finances improve

Ratings

Fitch Ratings upgraded China’s foreign and local currency sovereign ratings on Tuesday, citing better national finances and less need for the central government to support the banking system and local governments.

The move came on the same day as another ratings agency, Moody’s Investor Service, released an upbeat report on China, highlighting its efforts to restructure banks and state firms. Fitch raised China’s foreign currency rating to A-plus from A and its local currency rating to AA-minus from A-plus.

The outlook for both ratings is stable. “The steady improvement in public and external finances provides the authorities with additional policy flexibility in addressing, for example, any further support required by the banking sector,” said James McCormack, head of Fitch’s sovereign group in Asia. The foreign currency rating from Fitch, its fifth highest investment grade, is on par with Moody’s Investors Service’s A1 rating.

Standard & Poor’s has rated it a notch lower at A. Analysts said the rating upgrade would not have a significant impact because China had limited external debt and did not need any fresh international borrowing. “Technically, they don’t need to raise money in the international market for the moment. They have extraordinarily healthy fiscal revenues,” Stephen Green, a senior economist with Standard Chartered Bank, said in a client note.

Highest surplus
Fitch said its 2007 forecast for China’s current account surplus at $363 billion would be the highest on record for any country and its gross external debt, at 11% of GDP, is among the lowest in the world. Still, economists said some uncertainties remained. “China’s contingent liabilities might increase in the medium term because we know local governments have many hidden debts and the risks are high that those debts will be handed off to the central government,” said Gene Ma, chief economist at China Economic Monitor.

He added that because land sales represented a major source of income for local governments, land price volatility could hit revenue, and the central government might need to step in and help. But Fitch said government revenues had grown faster than the country’s GDP since 1996, leading to healthier fiscal balances and consistent declines in the consolidated deficit of the central and local governments since 2002.

Moody’s Investors Service was also upbeat about China in its annual report on the country released on Tuesday, saying its A1 ratings and stable outlook reflected successful reforms that have rapidly raised national income, propelled exports, and boosted foreign exchange reserves. “The progress made so far in the restructuring and modernization of banks and state-owned enterprises has reduced underlying public-sector fiscal weaknesses and has strengthened the government budget,” said Moody’s Senior Vice President Thomas Byrne. “Further reform is needed, however, to reduce financial market distortions,” he added. (signonsandiego.com)

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