Fitch issues warning against China's growth model

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 the 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 per cent of GDP, up from 124 per cent 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 per cent 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 per cent in 2013,

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