Bonds, Currencies, Emerging Markets, Stocks

China’s Credit Rating Outlook Lowered To Negative By Moody’s

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The outlook on China’s credit rating was lowered from stable to negative by Moody’s Investors Service on Wednesday as they cite a weakening of fiscal metrics, a continuing fall in foreign exchange reserves, and uncertainty about implementation of reforms.

According to Moody’s, the key drivers of China’s outlook revision are:

  •  The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet.

The first driver of the negative outlook on China’s rating relates to the government’s fiscal strength which has weakened and which we expect to diminish further, albeit from very high levels.

  •  A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks.

The second driver relates to China’s external vulnerability. China’s foreign exchange reserves have fallen markedly over the last 18 months, to $3.2 trillion in January 2016, $762 billion below their peak in June 2014.

  • Uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy.

Incomplete implementation or partial reversals of some reforms risk undermining the credibility of policymakers. 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.

The warning from the ratings agency underscores how the build-up in credit in China’s slowing economy and debt strains at the nation’s state-owned enterprises (SOEs) are adding to concerns about its creditworthiness

China’s SOEs have seen debt rise to 62 percent of assets from 55 percent in 2007, according to estimates from Shi Kang, an associate economics professor at the Chinese University of Hong Kong, Bloomberg reports.

“The ongoing increase in leverage across the economy and financial system and the stress in the SOE sector imply a rising probability that some of the contingent liabilities will crystallize on the government’s balance sheet,” Moody’s said.

Moody’s current Aa3 rating assessment of China currently sits at seven notches above junk status.

China is set for an annual parliamentary meeting on March 5 to lay out its economic development targets, after government authorities said back in September that they would reform “zombie enterprises,” while encouraging a “blending” between state and private capital.

China’s authorities are targeting economic growth in a range of 6.5 percent to 7 percent this year; the first time China has set a range on its economic growth, versus an actual target.

Rival rating agencies Standard & Poor’s and Fitch both have stable outlooks on China’s creditworthiness.

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