Sovereigns 

China 
Special Report 
China: Stimulus Hangover? 

Ratings  Summary 
Foreign Currency China’s economic policy has shifted gear since the publication of Fitch Ratings’
Long‐Term IDR A+
Short‐Term IDR F1 “China Sovereign Credit Assessment” in January 2010, as the authorities have
begun to unwind the policy stimulus administered in 2008‐2009 to counteract the
Local Currency global recession. The scale of stimulus delivered — some 3.3% of GDP in public
Long‐Term IDR AA‐
spending and a 16pp increase in the government credit growth target for 2009
Country Ceiling A+  against 2008 — raises the question of whether there will be some negative after‐
effect from the stimulus on sovereign creditworthiness, in particular via the public
Outlooks  finances and financial stability. Reviewing key recent developments, Fitch draws
Foreign‐Currency Long‐Term IDR Stable the following conclusions:
Local‐Currency Long‐Term IDR Stable 
· Public Finances/Local Government Debt: new information has come to light on
Analysts  the debt of local government investment companies (LGICs), with the China
Banking Regulatory Commission (CBRC) reporting LGIC loans at CNY7.7trn, or
Vincent Ho
+852 2263 9921
about 20% of GDP, at end‐June 2010. This could take general government (GG)
vincent.ho@fitchratings.com debt to between 32% and 47% of GDP on Fitch’s estimates, depending on the
extent of government liability for LGIC debt (which is still unclear). This
Andrew Colquhoun
+852 2263 9938 compares with the Fitch‐forecast end‐2010 median for ‘A’ range sovereigns
andrew.colquhoun@fitchratings.com  (those rated ‘A+’, ‘A’ and ‘A‐’) of 40%.
· Banking System: Fitch remains concerned over the possibility of a hangover
Related Research 
from the 32% rise in bank lending in 2009. The pace of credit growth and real‐
Applicable Criteria estate price growth/real exchange rate appreciation took China to the highest
· Sovereign Rating Methodology
(August 2010)
risk category in Fitch’s “Macro‐Prudential Risk Monitor” (June 2010). The
Other Research agency’s banks team sees downside risk to banking system asset quality in the
· Chinese Banks: Informal Securitisation wake of the credit binge, potentially leading to a need for sovereign support for
Increasingly Distorting Credit Data
(July 2010)
the sector, although it remains difficult to quantify the extent of the
· Macro‐Prudential Risk Monitor sovereign’s exposure.
(June 2010)
· Chinese Banks –Annual Review and
· Economic Policy: with the authorities tightening up credit policy once again,
Outlook (December 2009) Fitch’s base case is that the economy will experience a “soft landing” — from
· China (January 2010) 11.1% year‐on‐year (yoy) growth in H110 to 8.3% in H2. With policy flexibility
· Global Economic Outlook (October 2010) constrained by concerns over the problems stemming from previously‐strong
credit growth and the already‐high share of investment in GDP, Fitch believes
there is a risk that the authorities may resort to a wider budget deficit to
stimulate growth in a downside case for the world economy where exports
falter again. 
Public Finances: Impact of Disclosure Concerning Local 
Government Debt 
Fitch’s analysis of China’s government indebtedness has been based on available
figures on China’s direct central government debt plus financial restructuring debt
guaranteed or issued by the central government (expected at 24% of GDP in 2010),
while acknowledging the likely existence of substantial off‐balance‐sheet debt at
the local level.
However, figures released in 2010 by the National Audit Office and CBRC shed some
light on the matter. The stock of LGIC loans was reported at CNY7.7trn for end‐
June 2010, equal to 20% of GDP. The LGICs play a fund‐raising/financing role for
local governments because it is illegal for local governments to borrow directly
from financial institutions, issue debt in the market and issue debt guarantees. 

www.fitchratings.com  14 October 2010 

 Sovereigns

Central and Local Government Debt

(% GDP) 2008 2009 2010e 2011f 2012f
CG debt plus explicit LG debt n.a. 32.2 32.4 31.8 31.3
CG debt plus LGIC debt 35.1 46.7 47.1 46.6 46.1
CG debt 21.0 23.8 24.3 23.8 23.3
Domestic 20.2 23.0 23.5 23.0 22.6
Treasury securities 15.6 17.5 18.1 18.4 18.5
Financial restructuring bonds 3.6 3.3 2.9 2.4 2.1
Special infrastructure bond 1.1 2.3 2.5 2.2 2.0
External 0.7 0.8 0.8 0.8 0.7
Memo
1) Explicit LG debt n.a. 8.4 8.0 8.0 8.0
2) LGIC debt (ex. LGIC loans (off‐balance sheet)) 14.1 22.9 22.8 22.8 22.8
Loans 14.0 22.4 21.3 21.3 21.3
Bonds 0.1 0.5 1.5 1.5 1.5
3) LGIC Loans (off‐balance sheet) 1.0 1.5 3.1 3.1 3.1
Source: MOF, CBRC, National Audit Office, Fitch estimates and forecasts

Fitch notes four points about LGIC debt: first, the impact on general government
indebtedness is significant, albeit in line with the assumptions factored in to
previous sovereign credit reviews of China. Assessing this is complicated because
the scale of the government’s liability for these debts remains unclear. The LGIC
debt includes a portion of direct LG debt, worth 8.4% of GDP at end‐2009, with the
larger remaining portion consisting of borrowing under the LGIC’s own names
(possibly with implicit LG guarantees), worth about 14.5% of GDP. Adding direct LG
debt to CG debt yields a total of 32.2% for end‐2009, a total projected to remain
broadly constant by end‐2010.
However, the government has yet to clarify exactly how much of the broader LGIC
debt it will assume responsibility for repaying. This implies a range for GG debt of
between 32% and 47% of GDP at end‐2010, depending on how much LGIC debt falls
to the government. This compares with an ‘A’ range median for the GG debt/GDP
ratio at end‐2010 of 40% (see chart China’s Government Debt).

China's Government Debt

CG debt CG debt + explicit LG debt CG debt + LGIC debt ‘A’ median
(% GDP)
50

40

30

20

10

0
2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f
Source: MOF, CBRC, National Audit Office and Fitch forecasts

Increase in GG Debt/GDP, Second, Fitch notes the pace of growth of the LGIC debt — up 75% by end‐2009 on
2009 the end‐2008 debt total of CNY4.3trn. Counting all LGIC debt as government debt,
China’s GG debt/GDP ratio rose by 12pp over the course of 2009, the same as the
(pp) 
US (see chart Increase in GG Debt/GDP, 2009). However, government measures in
19
2010 appear to have had some effect in curtailing the rise in indebtedness; LGIC
15 loans rose by a further 4% to CNY7.7trn by end‐June 2010. These measures included
halting the funding of unproductive local government infrastructure projects,
11
stopping the sale of land by local governments to the LGICs as collateral for loans,
7 and ordering local governments to stop issuing letters of guarantee to the LGICs for
Irel'd Japan UK Gr'ce Spain US Chinaª bank loans.
ª China: CG debt plus all LGIC debt
Source: Fitch

China: Stimulus Hangover?

October 2010  2 
 Sovereigns

Third, one key complicating factor in LGIC loan figures is the increasingly
widespread banking practice of moving LGIC loans off balance sheet through
informal securitisation, as discussed by Fitch’s banks analysts in previous research1.
Fitch estimates the total LGIC debt in 2009 at about CNY8trn after incorporating
the LGIC loans that were removed and repackaged from the bank balance sheets,
adding about 1.5% of GDP to the total. Given the rapid rise in informal
securitisation along with the trends in Chinese bank lending (see Credit Boom 2009:
How Much of a Hangover? below), Fitch’s banks team estimates that an additional
1.5‐2pp in LGIC loans may be moved off banks’ balance sheets in 2010, which could
become important for the sovereign credit analysis.
Fourth, it remains more difficult to assess the true fiscal position of China than is
the case for most sovereigns, particularly at the ‘A’ range and above, due to
ongoing lack of transparency on LG debt. This lack of transparency in official data is
a negative feature in China’s sovereign credit profile, as Fitch has repeatedly
stated in previous reviews. 

Credit Boom 2009: How Much of a Hangover? 
Bank credit grew by 32% in 2009 as part of the government’s economic stimulus
policy. Fitch expects bank credit growth to slow to about 20% in 2010, as the
government tightens up on credit policy; it was running at 18.6% yoy as of
August 2010.
Nonetheless, private credit/GDP is set to reach 148% by end‐2010, against a median
for the ‘A’ range of 108% and for all emerging market economies of 41%, indicating
that banking sector risks are highly relevant for China’s sovereign creditworthiness.
Moreover, experience in many countries in 2008‐2009 indicates that banking system
stress, where it occurs, can rapidly spill over to affect sovereign creditworthiness.
No definitive assessment is possible of the scale of contingent liability facing the
sovereign, but developments since late‐2008 incline Fitch to the view that risks
have risen substantially.
Fitch’s macro‐prudential risk assessment methodology aims to track the build‐up of
potential stress in banking systems by measuring credit growth, asset prices (real
estate and share prices), and real exchange rates2. The assessment is calibrated
against previous instances of banking sector crisis to generate a Macro‐Prudential
Indicator (MPI) running from 1 (least risky) to 3 (riskiest).
China’s data pulled the triggers for a transition to MPI3 in the June 2010 review
(see table Bank Systemic Risk Matrix (Selected Countries) and table China: MPI3
Triggers). An additional Banking System Indicator (BSI) reports the asset‐weighted
average of individual bank ratings in a jurisdiction provided by Fitch’s analytical
teams (banks), from A (strongest) to E (weakest). China’s banking system is scored
‘D’ under this methodology, signifying a relatively weak banking system, although
this is the most common category for emerging market banking systems.

Bank Systemic Risk Matrix (Selected Countries)

1 2 3
A n.a. n.a. n.a.
B Canada, Hong Kong Australia, Chile Denmark, France, New
Zealand
C Germany, Malaysia, Italy, Korea Brazil, UK, US
Taiwan, Thailand
D Egypt, Hungary, Belgium, Greece China, Ireland, Russia
Philippines
E Argentina, Kazakhstan Ukraine, Vietnam
Source: Fitch’s “Macro‐Prudential Risk Monitor”, June 2010

1
“Chinese Banks: Informal Securitisation Increasingly Distorting Credit Data”, July 2010
2
See Fitch’s “Macro‐Prudential Risk Monitor”, under Related Research on front page

China: Stimulus Hangover?

October 2010  3 
 Sovereigns

A full discussion of risks in the Chinese banking system is beyond the scope of this
report, but it is worth noting that Fitch’s China banks team has repeatedly
expressed concerns about a deterioration in bank asset quality over the medium
term — following recent sharp growth in loans, heavy local government borrowing
(as discussed above), tentative signs of overheating in some segments of the
property market, and rising off‐balance‐sheet activity.
These concerns arise even though headline asset quality indicators remain relatively
favourable, with the official system NPL ratio for commercial banks dropping to
1.3% at end‐June 2010 from 1.7% at end‐2009 (and 8.6% at end‐2005). Two areas
are worth discussing here: bank exposure to LGICs and the real estate sector.

China: MPI3 Triggers

Trigger China (2008/2009)
Real credit growth >15%/year, averaged over two years 18.6%
Real growth of house prices >5%/year averaged over same two years 7.9%
Real exchange rate >4%/year for two years 5.3%
Source: Fitch’s “Macro‐Prudential Risk Monitor”, June 2010

According to the CBRC, approximately 20%‐25% of loans to LGICs (roughly CNY1.8trn

or 5% of GDP) have been identified by Chinese banks as carrying serious repayment
risk. If these loans were indeed to become non‐performing, it would add
approximately 4pp (Fitch’s estimation) to the current system‐wide NPL ratio for
commercial banks. However, to the extent that the sovereign may have to
recompense the banks for losses arising from LGIC loans that are allowed to go bad,
the question becomes a secondary one — which part of the broader public sector
absorbs the loss, mitigating the consequences for sovereign creditworthiness.
China’s banking regulator has spoken up about the impact of a possible property‐
price adjustment on banks. Reportedly, the CBRC in July 2010 asked banks to
conduct another round of stress tests by assuming that residential property prices
would fall by as much as 60%. Fitch’s banks team is very cautious about the results
of any stress‐testing given the absence of robust data on loan delinquencies in an
adverse economic environment. That said, previous stress tests by the CBRC
indicated that the NPL ratio of real estate loans would rise a modest 2.2pp if home
prices drop by 30% and interest rates rise by 108bp. 

Property Price Growth of 70 Cities 

Co mpo site  Newly co nstructed 
(yo y %)  Newly co nstructed (residential)  Seco ndary market 
Seco ndary market (residential) 
20 

15 

10 

5 

0 
Property Price Growth by
­5 
City Classification  Jul 05  M ay 06  M ar 07  Jan 08  No v 08  Sep 09  Jul 10 
Tier 1 cities  So urce: CEIC and Fitch estimates 
Tier 2 cities 
(yo y %) Tier 3 cities and belo w 
15  Fitch shares the CBRC’s concern about the potential impact of developments in the
10  property sector, although the overall property price growth in 70 cities (see chart
5 
Property Price Growth of 70 Cities) does not appear too overheated; indeed, price
0 
growth across 70 cities has dipped since May. The share of real estate loans
increased to 18% of total loans at end‐Q210 from 17% at end‐Q409, while housing
­5 
mortgage loans increased to 12% from 11%, although Fitch’s banks team cautions
Jul 06  Jul 07  Jul 08  Jul 09  Jul 10 
that these figures may not disclose the full scale of banks’ real estate exposures
So urce: CEIC and Fitch estimates 
(owing to lack of transparency in the data). 

China: Stimulus Hangover?

October 2010  4 
 Sovereigns

Main Stimulus Drivers Economic Outlook: from Stimulus to Restraint? 

GG expenditure (% GDP) In late 2008, as the scale of the post‐Lehman shock to the global economy was
(%) Credit growth (%) becoming clear, the Chinese government introduced a fiscal economic stimulus
35 package of CNY4trn (12% of GDP) for 2009‐2010. About half has been spent through
28 the general government budget (mainly for spending related to agriculture,
21 environment protection, social welfare, healthcare and reconstruction) after the
14 Sichuan earthquake in May 2008. The other half was directed at off‐budget
7 infrastructure investment spending mainly through the LGICs. This package was
0
supplemented by monetary stimulus, as discussed above.
2008 2009 2010e
The impact of the stimulus can be seen in the chart Main Stimulus Drivers.
Source: MOF, CEIC and Fitch estimates 
Supported by government spending and by credit, the growth contribution from
investment increased to 11.8pp in 2009 from 4.3pp in 2008, while the net trade
contribution turned negative (‐10.2pp, from +0.4pp in 2008). Overall, growth was
sustained at 8.7% for 2009. But with growth surging to 11.9% yoy in Q110, the
Incremental Capital Output authorities reined back on the stimulus, tightening credit controls (see Appendix 1)
Ratios and slowing fiscally‐funded investment. Fitch forecasts China’s economy to grow by
China  India  9.7% in 2010; GDP growth eased to 10.3% yoy in Q210, and the agency’s base case is
B razil  of a “soft landing” to a still‐strong 8.3% rate of growth in H210, with 8.6% projected
6  for 2011.
5 
4 
The stimulus programme has had the effect of further raising the share of
3 
2  investment in GDP, to 47% in 2009 from 44% in 2008; the 2009 figure was well above
1  China’s five‐year average of 44%, and the second‐highest for any sovereign rated by
0  Fitch (behind only San Marino (‘A’)). The median for emerging markets was 22%.
2000  2002 2004  2006  2008  2010  2012f 
So urce: IM F, CEIC and Fitch fo recasts  Investment on this scale gives rise to Fitch’s first key area of concern: whether
resources have been deployed efficiently, at least in comparison with recent
historical experience. Anecdotal evidence abounds of misallocated spending, giving
rise to a concern that wasted investment may put a drag on China’s economic
performance in the near to medium term.
This risk is difficult to assess rigorously. One approach is to consider the efficiency
of investment measured at the aggregate level (using the Incremental Capital
Output Ratio — a ratio of annual investment over an annual change in GDP, or
ICOR). The ICOR for China shows a modest decline in 2010. The key point from the
chart Incremental Capital Output Ratios is that Fitch’s base case for Chinese growth
implies that the ICOR over the medium term to remain reasonably low, i.e. that
there has been no significant deterioration in the quality of investment since 2010.
Mounting evidence of substantial capital misallocation could cause Fitch to revise
downward its growth projections for China.

Contribution to Growth
Private consumption Investment Public consumption Net trade
(%)

20
16
12
8
4
0
‐4
‐8
‐12
2003 2004 2005 2006 2007 2008 2009 2010 2011f 2012f
Source: IMF and Fitch forecasts

China: Stimulus Hangover?

October 2010  5 
 Sovereigns

A second concern arises over how China’s authorities would manage the impact of a
Government Fixed Asset global “double dip”, which would further weaken the export contribution to
Investment Growth growth. Retrenchment in credit policy and, it would appear, in government fixed‐
(Seasonally Adjusted)
asset investment (see chart Government Fixed Asset Investment Growth) suggests
that the authorities are already concerned about the distortionary impact of 2009’s
(yoy %) stimulus, and may hesitate to engineer a further rise in investment.
35

30
Fitch believes the authorities would prefer to see stronger household consumption
consistent with minimum wage growth, and official toleration of industrial action in
25
2010 (see chart Minimum Wage Growth). The only component of aggregate demand
20
left to the authorities through which to respond to a shock to external demand
15
would be government consumption. Fitch therefore sees some risk of a
Mar 05 Dec 06 Oct 08 Aug 10
deterioration in public finances should the global recovery falter, which could
Source: CEIC and Fitch estimates
potentially become a concern for the ratings given that China’s general government
debt already seems likely to be around the ‘A’ median.
Fitch believes that meaningful shifts in the yuan’s exchange rate are unlikely to
Minimum Wage Growth
play a significant role in economic management. The agency believes that scope for
(Nation average)
yuan depreciation in response to any further contraction in world demand is likely
2006
to be extremely limited by political factors, i.e. the likelihood of strong US
2007
disapproval.
2008
2009
The yuan has appreciated by over 2% since the announcement of greater
2010e
liberalisation in June 2010. Fitch believes the Chinese authorities are likely to
0 10 20 30 40 remain very wary of permitting strong yuan appreciation for fear of the impact on
(%)
exporters. The agency instead believes the authorities will aim to support economic
Source: CEIC and Fitch estimates rebalancing towards consumption more through faster wage growth and real
effective exchange rate (REER) appreciation. 

China’s Inflation and Exchange Rates 

Real effective exchange rate (% change; + = appreciatio n) 
Real CNY/USD exchange rate (% change; + = appreciatio n) 
No minal CNY/USD exchange rate (% change; + = appreciatio n) 
(%)  China's inflatio n rate 
13 

8 

3 

­2 

­7 
2003  2004  2005  2006  2007  2008  2009  2010  2011f  2012f 
So urce: IM F, CEIC and Fitch fo recasts 

China: Stimulus Hangover?

October 2010  6 
 Sovereigns

Central Bank Bill Rates Appendix 1: Measures to Tighten Credit Policy 

The authorities have been withdrawing monetary stimulus by:
CBB rate (3m)

(%)
CBB rate (12m) · lowering the system‐wide lending and M2 growth target to CNY7.5trn and 17%,
2.5 respectively, by end‐2010 from CNY9.6trn and 28%, respectively, at end‐2009.
2.0 Monthly credit quotas have been employed to keep track of lending growth,
1.5
which has been broadly consistent with the target;
1.0 · tightening domestic liquidity conditions by increasing the issuance of central
0.5 bank bills (CBBs), therefore pushing up the CBB rates;
0.0
· raising the required reserve ratio several times since February 2010.
Jan 09 Jun 09 Oct 09 Mar 10 Aug 10
Source: CEIC With respect to LGIC credit risk, both the People’s Bank of China (PBOC) and CBRC
have asked banks to strengthen their risk assessment of lending to LGIC projects.
The CBRC has instructed banks to reappraise all lending to LGICs, and requested
additional collateral to back loans to those borrowers with weak or insufficient cash
flows.
Since end‐2009, the authorities have continued to impose strict credit measures to
cool down the activity of the property sector.

· In April, the minimum downpayment ratio for first homes of over 90 square
metres (sq m) was increased to 30% from 20%. This 30% minimum downpayment
ratio was then extended to properties of all sizes in September. In April, the
minimum downpayment for second homes was also raised, to 50% from 40%. The
mortgage interest rate was adjusted from discounts to premiums over the
benchmark interest rate. Restrictions on bank loans and equity issuance were
imposed for property developers with idle land or those found speculating in
land.
· In August, banks were ordered to stop mortgage loans to third‐home buyers in
some major cities (including Beijing and Shanghai). This was extended to the
rest of the country in September. In September, banks were ordered to
maintain the minimum downpayment at 50% for second homes, and the
mortgage rate above 110% of the PBOC’s benchmark interest rate.
· In September, further measures prevented developers from bidding for land if
they held plots left undeveloped for more than one year, in an effort to curb
speculative land bidding.

China: Stimulus Hangover?

October 2010  7 
 Sovereigns

Appendix 2: China’s Track Record of Restructuring Banks 
Fitch believes there is high likelihood that the Chinese sovereign would support the
banking system in case of need. But the government’s resources are not limitless,
and are expected to decline over the medium term (eg foreign exchange reserves
relative to GDP are projected to decline to 41% in 2012 from 47% in 2010).
Consequently, in the event of a systemic stress scenario, support for some
(generally smaller) banks could be less comprehensive and timely than for larger,
systemically important banks.
Fitch’s strong expectations of sovereign support are underscored by the Chinese
government’s long track record of support for domestic banks. Since the late 1990s,
China has undertaken a number of significant fiscal measures to repair bank
balance sheets. These measures were initially implemented on the large state‐
owned commercial and policy banks (which account for roughly 60% of China’s
banking sector assets), and were then extended to other problem parts of the
financial sector (such as securities firms).
A large portion of state support has been channelled through China Central Huijin
Investment Corporation Limited (Huijin), which was created as an entity under the
PBOC in 2003. Huijin is a major shareholder in six commercial banks, nine securities
firms, two financial holding groups, an insurance company and a re‐insurer.

· In August 1998, China’s government issued a special government bond of

CNY270bn (3.1% of 1998 GDP) to recapitalise the “Big Four” state banks.
· In 1999‐2000, the government paid for the carve‐out of CNY1.4trn (equivalent
to 20% of total loans or 16% of GDP) in NPLs from the Big Four state banks and
China Development Bank. These NPLs were transferred to four newly created
state‐owned asset management companies (AMCs) which were put in charge of
recoveries. The NPL transfer was financed 59% by bonds issued by the AMCs
(implicitly guaranteed by the MOF) and 41% by PBOC credit and cash.
· Since 2003, the Chinese government has drawn on its foreign exchange reserves
to inject an additional USD102bn into the Big Four state banks, China
Development Bank, Bank of Communications, and China Everbright Bank.
Meanwhile, the government has financed another CNY1.6trn in NPL carve‐outs
from the Big Four and Bank of Communications since 2003. These carve‐outs
have been financed using a combination of MOF receivables, PBOC bills, and
bonds issued by the state AMCs.

China: Stimulus Hangover?

October 2010  8 
 Sovereigns

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ
THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND
THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT
WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM
THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST,
AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO
AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
Copyright © 2010 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1‐800‐753‐4824,
(212) 908‐0500. Fax: (212) 480‐4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights
reserved. In issuing and maintaining its ratings, Fitch relies on factual information it receives from issuers and underwriters and from
other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in
accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent
such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the
third‐party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in
the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public
information, access to the management of the issuer and its advisers, the availability of pre‐existing third‐party verifications such as audit
reports, agreed‐upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by
third parties, the availability of independent and competent third‐party verification sources with respect to the particular security or in
the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings should understand that neither an enhanced
factual investigation nor any third‐party verification can ensure that all of the information Fitch relies on in connection with a rating will
be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch
and to the market in offering documents and other reports. In issuing its ratings Fitch must rely on the work of experts, including
independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are
inherently forward‐looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts.
As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at
the time a rating was issued or affirmed.

The information in this report is provided “as is” without any representation or warranty of any kind. A Fitch rating is an opinion as to the
creditworthiness of a security. This opinion is based on established criteria and methodologies that Fitch is continuously evaluating and
updating. Therefore, ratings are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a
rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is
not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were
involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report
providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the
issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at anytime for any reason in the
sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any
security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax‐
exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other
obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency
equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a
particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable
currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its
name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and
Markets Act of 2000 of Great Britain, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic
publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.

China: Stimulus Hangover?

October 2010  9 
http://www.fitchratings.com/jsp/general/login/LoginController.faces?script_name=%2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D491946

http://www.fitchratings.com/jsp/general/login/LoginControll...2Fcreditdesk%2Freports%2Freport_frame.cfm%3Frpt_id%3D49194614.02.2011 20:28:08