Moody's cuts China outlook to 'negative', cites reform, fiscal risks
[SHANGHAI] Moody's downgraded its outlook on Chinese government debt to "negative" from "stable" on Wednesday, citing uncertainty over authorities' capacity to implement economic reforms, rising government debt and falling 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 on Wednesday.
Moody's 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 risks, were reviewed.
The agency said the downgrade was driven by expectations that China's fiscal strength will continue to decline, and the fall in its foreign exchange reserves which have shrunk by US$762 billion over the last 18 months.
It also said that policymakers' credibility 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.
Moody's, however, retained China's Aa3 rating, noting the country's sizeable reserves gave it time to implement reforms and gradually address economic imbalances.
But the agency warned that it could further downgrade China's rating if it saw slowing down of reforms needed to support sustainable growth and to protect the government's balance sheet.
"It's not a worrying sign yet, but rather a negative direction. That's what Moody's is flagging," said Trinh Nguyen, senior economist for emerging Asia at global asset manager Nataxis.
"But they have room to do this. They have one of the lowest government debt as a share of GDP in comparison to other emerging nations. And most importantly, as China has a current account surplus it can fund its own fiscal expansion."
REUTERS
BT is now on Telegram!
For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes
International
SNP veteran John Swinney set to be Scotland’s next leader
Shell in talks to sell Malaysia fuel stations to Saudi Aramco: sources
Israel begins evacuating part of Rafah, Hamas decries 'dangerous escalation'
Macron, Von der Leyen press China’s Xi on trade in Paris talks
Eurozone business activity grows at fastest pace in almost a year, PMI shows
China May Day holiday spending delivers mixed picture on post-Covid recovery