Moody downgrades China’s debt outlook ratings from stable to negative

04/03/2016

Chinese flag in mistChina’s debt outlook: The international credit ratings agency Moody’s has downgraded its outlook on Chinese government debt from “stable” to “negative”, citing uncertainty over authorities’ capacity to implement economic reforms, rising government debt and falling reserves. The downgrade comes just days before the National People’s Congress (NPC) is due to vote on China’s 13th five year plan, a closely held development blueprint for the next five years, which policymakers began formally drafting in 2015.
Analysts will be closely scrutinising the NPC’s final text for hints on the likely trajectory of reform and policymakers’ thinking on the appropriate growth strategy for China – key factors highlighted by Moody’s in the report issued on Wednesday.
“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.
The agency said its rating committee had discussed China’s status at a meeting on Feb. 9, during which the country’s institutional and fiscal strength, as well as its susceptibility to event risk, were reviewed. and that the downgrade was driven by expectations that China’s fiscal strength will continue to decline, as well as the fall in its foreign exchange reserves which have shrunk by $762 billion over the last 18 months.Policymakers’ credibility was at risk of being undermined by incomplete implementation or partial reversals of some reforms, it added.
“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 nevertheless retained China’s Aa3 rating on the grounds that the country’s sizeable reserves gave it time to implement reforms and gradually address economic imbalances.

Source: reuters