Moody's today downgraded its outlook on Chinese government debt to "negative" from "stable" , citing uncertainty over authorities' capacity to implement economic reforms, due to government debt and declining reserves.
"Without credible and efficient reforms, China's GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavourable. Government debt would increase more sharply than we currently expect," Moody's said in a note today.
According to Moody's, its rating committee had discussed China's status at a meeting on 8 February, during which the country's institutional and fiscal strength, as also its susceptibility to event risks, were reviewed.
According to the agency, the downgrade was based on expectations of a continuing fall in China's fiscal strength, as also its foreign exchange reserves which declined by $762 billion in the last 18 months.
It further added that the credibility of policymakers was at risk of being undermined by incomplete implementation or partial reversals of some reforms.
"Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty about policy priorities," Moody's said.
The agency, however, left China's Aa3 rating unchanged, noting that the country's sizeable reserves gave it time to implement reforms and gradually address economic imbalances.
Meanwhile, China's yuan firmed up against the dollar today, despite Moody's decision to downgrade the outlook for Chinese sovereign debt.
According to a trader from a Chinese commercial bank, recent interventions by state banks on behalf of the People's Bank of China (PBOC) ''have really dampened the market mood as it sees no chance of big yuan swings under the PBOC's firm hand,'' Reuters reported.
According to traders, yesterday's strong signals by the central bank, guiding the midpoint stronger to offset the impact from weak manufacturing activity and an easing move, sent out the message that it was capable of maintaining the yuan's stability in a volatile economy.