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China's investment-led development model is facing increasingly serious constraints, a global ratings agency warned, although GDP growth is likely to reach 8 percent in 2013.
Rapidly expanding credit, especially debt-financing by local governments, is one of the prime reasons behind the warning, Fitch Ratings said.
The agency announced on Tuesday 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, rebalancing
will be a long-term challenge," Andrew Colquhoun, head of the agency's Asia-Pacific Sovereigns section, said.
"Rebalancing 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 percent of GDP, up from 124 percent 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 predicted that China's credit may expand at a pace of 15 percent year-on-year in 2013.
He also warned that the shadow banking system may increase potential risks for the stability of the country's financial sector.
The agency expected that 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 percent in 2013, picking up from 6 percent in 2012," Colquhoun said.
Key risks facing the region include the US fiscal position and eurozone stability, he added.
In another development, Justin Yifu Lin, a former World Bank chief economist and senior vice-president, predicted China would see its GDP growth reach 8.5 percent in 2013, and probably maintain that figure for the next decade.