Moody’s has warned it could downgrade China’s sovereign rating, after changing the country’s outlook from stable to negative.
A negative outlook can be a precursor to a downgrade in the actual rating within the next 18 months. Moody’s warning and commentary comes several days before the start of the 12016 People’s Congress in Beijing where GDP, inflation, trade and other growth targets for 2016 will be confirmed, along with the outline of the 2016-2020 economic plan.
The move is the strongest sign yet of increasing investor concern about the country’s rising debt and d falling foreign exchange reserves.
Moody’s currently rates China’s government at Aa3, its fourth highest rating – Australia is Triple A rated by moody’s Fitch and Standard & Poor’s.
The change in outlook puts Moody’s rating for China between those of Standard & Poor’s rates China – AA-, (equivalent to the Moody’s rating but with a stable outlook) and Fitch which has China on A+, which one rung lower than its other two. Fitch’s outlook is stable.
In addition to rising government debt and falling reserves, Moody’s statement mentioned as another areasof concern – “uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy”.
Moody’s said in its statement that China’s government’s fiscal strength is weakening and there’s a growing probability that it will need to shoulder some of the liabilities of local governments, policy banks and state-owned enterprises.
Falls in China’s foreign-exchange reserves amid capital outflows underscore policy, currency and growth risks, while failure to undertake reforms may undermine the credibility of policy makers, it said.
Moody’s joined Standard & Poor’s in warning rising local debt has the potential to add pressure to the country’s rating.
The downgrade came two days after China’s central bank, The People’s Bank of China surprised by cutting lenders’ reserve-requirement ratios to their lowest level in five years this week to bolster an economy expanding at the slowest pace in a quarter century.
That was after Chinese banks boosting lending in January to record new highs – but much of that is considered to be banks committing to loan deals for the coming year, while not actually advancing funds – which usually start a month or so later. The banks are given quotas at the start of each year to fill.
Moody’s affirmed China’s long-term credit rating of Aa3, saying the country’s fiscal and foreign reserves remain "sizeable," giving the authorities time to implement some reforms and "gradually" address imbalances in the economy.
But Moody’s said it may downgrade China’s rating if the pace of reforms needed to support growth slows.
