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China hard landing unlikely but debt levels a concern: Fitch

The slowdown in China worrying global investors is unlikely to result in a hard landing although high debt levels are a concern, said Fitch Ratings in a special report released on Wednesday.

Fitch is still maintaining its stable outlook on China's credit rating for now, unlike peers Standard & Poor's and Moody's Investors Service who have lowered the outlook in recent weeks amid concerns over debt levels in the world's second-largest economy.

"Fitch Ratings believes strongly that China has the administrative and financial resources to avoid a disruptive slowdown to near-zero growth over the rating outlook horizon of about two years," the agency said in an announcement.

Fitch has a A+ sovereign rating on China but has not raised it to AA due to "high and rising" leverage in the economy which it said is a source of "systemic vulnerability."

Fitch expects China's economy to grow between 6 to 6.5 percent in 2016 and 2017. The country's official growth target is 6.5 to 7 percent this year.

China's currency has come under scrutiny since a hefty devaluation last August rocked global financial markets and fueled a surge in capital outflows amid expectations that authorities will guide the yuan lower to bolster the economy.

The ratings agency thinks China "has the will and the means not to devalue the yuan substantially against its new basket."

"There would be risks and costs with a large devaluation. Such a development would be a major negative shock for the global economy that could rebound on China by generating systemic stress among emerging markets globally, particularly in the Asia-Pacific region, and provoking a backlash from global trade partners – it could even mean the unraveling of the current open global trading regime."

A large devaluation would also undermine the progress that China has made so far on its transition to a greater emphasis on consumption from an earlier reliance on manufacturing, as a weaker currency would depress household real incomes and strengthen the profitability of exporting companies, Fitch said.

High leverage is still the key concern for the economy with the stock of aggregate financing, excluding equity-raising, rising to 198 percent of GDP by end-2015 from 115 percent at end-2008, according to official data.

Fitch says this was likely closer to 250 percent in 2015 and economic targets agreed at the National People's Congress this year suggest that authorities are "content" to see the country's debt continue to rise in 2016 with aggregate financing moving up by 13 percent, the ratings agency added.

China however will be able to weather the uncertainties due to its unique financial system.

"China's financial system is dominated by banks and funded overwhelmingly by retail deposits. Both the banks and borrowers are either state-owned or heavily state-influenced. These factors combine to suggest that the kind of collapse of confidence among creditors that might precipitate a financial crisis is unlikely in China," Fitch said.

In the long term, structural reforms will be key as the current credit-driven, investment-intensive growth pattern is unsustainable, said Fitch.

The restructuring of state-owned enterprises this time is also likely to be more gradual than the same process in the late 1990s with mass privatization and widespread layoffs not likely outcomes.

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