Thursday, April 18, 2013

China's Long Term Local Currency Default Rating Downgraded

Fitch has downgraded China's long term local debt outlook from an AA- to A+. While the Foreign Currency Issuer Default rating has been affirmed as looking relatively strong, relatively strong meaning that it deserves it's A+ rating, due in large part to the vast foreign debt instruments it owns; I would disagree. China's long term local debt outlook doesn't look quiet as strong due to these items:
  • China's stock of bank credit is 137% the size of of Private Sector GDP; this might be a new sovereign analysis metric to look at and I like how they use Private Sector GDP instead of just official GDP which I think is a better indicator of economic health.
  • Shadow banking has shot up by 73 percentage points since 2008.
  • China's local government debt, which even back in 2011 severely underestimated actual debt levels, which has increased the rest for local default.
  • Decreased fiscal revenue.
  • And the opaqueness in regards to debt from corporations that are linked to local governments.
One think I have stressed is that China didn't give up communism for capitalism, not by a long shot. All those 'private' corporations are often just shell companies where the largest investor is the local government. China didn't really dismantle it's state run industries so much as add many additional layers to give it the veneer of a private enterprise. In the end the government, often as a major stockholder of the company, still calls the shots.

What also needs to be remembered is that, while a downgrade from AA- to A+ doesn't seem like a major deal, the ratings agency also only downgraded the United States from AAA to AA+ back in 2011; and how many individuals think that a nation with debts in excess of its GDP is really a AA+ debt risk?  In my mind, knowing how reluctant ratings agencies are to actually list a countries actual debt rating according to sound judgement of the data, any sort of downgrade should be considered as a big deal.


  1. China has been competing on the global market successfully not only due to their cheap labor pool, but mass subsidization of industry. So I would agree with your assessment that Communism hasn't left the building, but add that there's an indirect form of Socialism as well (the type practiced by Captialist countries).

    We can't compete with the cheap Chinese solar panel industry, for example. Nor can anyone else...makers of solar panels around the world went broke or are in the process of bankruptcy attempting to do so as China sells them at a loss, with the aid of government subsidization.

    It's a sort of world market Walmart example. Sell products cheaper than anyone else can, and take them all over until you corner the market. Our only saving grace is (ironically, government subsidization this) our military industry that offers current technological innovations (not inexpensively). For instance, the US has developed the world’s most efficient solar chargin pads, for the US military by Alta Devices.

    1. Agreed and you are absolutely correct with subsidization. I'd Ultimately the tactics China takes will severely hamper future economic growth and could even cause major social instability. Eventually the economic realities have to be adderssed, inefficiencies purged and those ineffecient industries being propped up by the PRC will implode, and when they do a lot of bad things are going to happen.


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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.