Moody's lowers China's outlook, affirms bond rating of Aa3

Moody's Investors Service today affirmed China's government's bond rating of Aa3, cutting the outlook, however, from positive to stable, the second negative revision by a foreign ratings agency this month. The country's long-term local currency credit rating was cut by Fitch To A-plus from AA-minus.

The agency cited concerns over the risk that excessive local government borrowing posed to the wider economy. The same issue had been referred by Moody's referred to justify its downward revision.

According to Moody's, progress had been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth. Some of the upward pressure on Aa3 had therefore eased.

Thr ratings agency said it affirmed the Aa3 rating because of China's credit fundamentals, which had been underpinned by continued robust economic growth, strong central government finances as also exceptionally strong external payments position.

The report pointed out more reform would be required to prevent a buildup of pressures that could increase the risks of a hard landing for the Chinese economy.

However, it credited China for maintaining better fiscal metrics than Belgium or France, and noted that China's massive international investment position meant that its external assets exceeded its domestic liabilities to the tune of $1.8 trillion.

Moody's said only a handful of highly rated advanced industrial economies - such as Norway, Switzerland, Japan, Hong Kong and Singapore - had a stronger international investment position.

Moody's said the nation had made less progress than anticipated in reducing risks from local-government debt and credit expansion.

In a statement from Singapore the agency today said it affirmed that the scope and pace of ''structural reforms under the new leadership'' may not be sufficient over the next 12 to 18 months to justify an upgrade of China's Aa3 rating.

The comments increase concerns that risks were building up that might hurt growth in the world's second-largest economy following unexpectedly slowing of expansion to 7.7 per cent in the first quarter.

''Effective macro-prudential regulation of the financial system and the advancement of a broad range of reforms will likely be necessary to prevent the build-up of imbalances which could increase the risks of a hard landing for the economy,'' Moody's said.

"Credit-positive structural reforms under the new leadership are expected over time, but their scope and pace may not be sufficient over the course of the next 12-18 months to justify a rating upgrade," Moody's said in a statement.

"Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased."