The Fitch downgrade of China’s credit rating is interesting because it is ANTICIPATING that China will have to bailout the state and local governments as well as banks. Under this approach, Europe should be downgraded to JUNK status.
Fitch downgraded China’s sovereign credit rating for the first time since 1999 because of concerns that the country’s rising debt problems will require a government bailout. The downgrade was from AA- to A+, citing a number of “underlying structural weaknesses” within the Chinese economy primarily focusing upon the rapid expansion of credit. What they are actually doing is trying to predict the next economic recession. They are a few years ahead of schedule. That will be 2016.
Fitch has warned about the rise of shadow banking, and said that total credit in China may have reached 198% of gross domestic product by the end of last year, up from 125% in 2008. It is true, that since 2009 state-owned banks poured into the economy loans to power it through the global financial crisis. Fitch views that this credit surge succeeded in keeping Chinese growth on track, however they assume this has led to a bubble in the housing market while bloating the local governments creating mountains of loans that they are still struggling to repay.
This type of anticipation is rather unique. Under this approach, Europe and Japan should be written off right now. The more troubling aspect with China’s holding is its exposure to Japan. The JGBs on the TSE at least elected a Weekly Bearish Reversal and a monthly closing below 14300 will signal a broader change in trend. With North Korea feeling insane or its Oats, the risk of Japanese assets has been rising exponentially. China’s exposure to Japan is greater than that of Europe. So any real credit risk for China must be viewed with Japan while realizing that the mountain of cheap loans in dollars globally has created perhaps the largest short position of all time.
