Fitch downgrades China's credit rating and the markets yawn

04/10/2013 5:13 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

It’s clearly going to take more than a credit rating downgrade from Fitch Ratings to get the attention of China’s stock markets. Yesterday Fitch cut China’s long-term local currency credit rating from AA- to A+. Because of the uncontrolled growth of China’s shadow banking sector, Fitch said, total credit may have reached 198% of GDP by the end of 2012, up from 125% in 2008.

Despite the downgrade, the iShares FTSE China 25 ETF (FXI) were up 0.5% today.

“Ultimately, we think China’s debt problem is going to require sovereign resources to resolve and debt will migrate onto China’s sovereign balance sheet,” Fitch told the Financial Times.

In other words China’s financial system is going to need a government bailout like those in Ireland, Greece, and Cyprus.

After the downgrade Fitch’s rating is one grade below those of Moody’s Investors Service and Standard & Poor’s, which both upgraded their views on China in 2010.

Fitch Ratings has consistently been the most aggressive of the Big Three credit ratings companies on China issuing multiple warnings in the last two year about the level of debt being accumulated by local governments, about the likelihood that loans from local governments would go bad, and about the growth of the shadow banking sector as banks and speculators did an end run around government regulations designed to restrict the growth of borrowing.

My guess is that traders and speculators may agree with the Fitch warning, but that they don’t want to leave the party quite yet. Liquidity flowing through the shadow banking system may ultimately lead to a government crackdown and a government bailout, but right now it supports prices in the real estate and financial markets.

As Saint Augustine said in a somewhat different context: “Give me chastity and continence, but not yet.”

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