Hidden letters of credit (L/Cs) may be contributing to what some analysts say is a looming debt crisis for China as borrowings soar at an alarming rate.

Ratings agency Fitc, appears to be leading the way in flagging up China's surging indebtedness, last month cutting the nation's long-term local-currency rating.

Debt estimates

Conservative estimates put China's debt to GDP ratio at 160 per cent, but according to Charlene Chu of Fitch,it is more like 200 per cent.

She says that L/Cs, along with financing by non-bank institutions and offshore loans by foreign banks, push the debt to GDP ratio up a substantial 40 per cent.

Crucial warning

Chu believes the ratio provides a crucial warning that has already signalled other financial crises in Asia.

She also indicates that the scale of the crisis in China could be much greater than in previous economic meltdowns.

Comparisons

China's debt to GDP ratio has increased 73 per cent in four years, Fitch estimates.

A similar surge preceded Japan's banking crises, but the measure surged 45 per cent from 1985 to 1990.

In South Korea, the ratio grew by 47 per cent between 1994 and 1998, according to Fitch.

Unreliable data

The ratings agency points out that its ability to rate China is compromised by unreliable financial sector data, while the central bank does not provide an estimated debt to GDP ratio.

Fitch is the first of the top three ratings agencies to downgrade China's long-term currency rating in 14 years.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.