Fitch issues warning against China's growth model

Says model faces serious constraints due to heavy debt financing by local governments

Global ratings agency Fitch has warned that China's "investment-driven growth model" faces increasingly serious constraints due to heavy debt financing by local governments.

Rapidly expanding credit, especially debt financing by local governments, is one of the prime reasons behind the warning, Fitch Ratings said.

The agency announced yesterday a currency sovereign rating of AA- for China, on a negative outlook, while it kept its stable outlook of A+ for the country's foreign debt holdings.

Rapidly expanding credit may risk balance sheets, it said.

"China has been avoiding the so-called hard landing. However, re-balancing will be a long-term challenge," Andrew Colquhoun, head of Fitch's Asia-Pacific Sovereigns section was quoted by the state run China Daily today.

"Re-balancing is imperative but not optional, because the debt issue is tightening constraints on the old investment-driven growth model," he said.

The total amount of credit in China's economy is currently about 190% of GDP, up from 124% at the end of 2008, Colquhoun said.

"So the debt level is increasing substantially. This debt could come from local government financial vehicles, guarantees, support from the banks or other routes," he said.

Colquhoun said China's credit may expand at a pace of 15% year-on-year in 2013. He also said the shadow banking system may increase potential risks for the stability of the country's financial sector.

Fitch expected the macro-economic backdrop will be supportive of sovereign credit in Asia this year.

"Asia is likely to remain the world's fastest-growing region with growth of about 6.4% in 2013, picking up from 6% in 2012," Colquhoun said.

Key risks facing the region include the US fiscal position and euro-zone stability, he said.

Economists have predicted that the whole-year growth for 2012 would beat the 7.5% target with forecasts that it will post GDP growth of around 8%.

Greater domestic consumption and infrastructure investment will support the rebound, according to a report by the Institute of Economic Research at Renmin University of China.

"China's domestic market is growing rapidly, and this will remain a key driver for the country to maintain economic growth," said Wang Jianye, chief economist at the Export-Import Bank of China.

"While domestic investment has and will generate economic growth in the coming years, China's stable fiscal policy will also help the country's stable growth," he said.