Moody’s cut its outlook on China’s credit rating from “stable” to “negative” as the ratings agency warned investors about rising government debt, increasing capital outflows and uncertainty over Beijing’s capacity to tackle imbalances in the economy.
The agency still kept China’s credit rating at Aa3, the fourth-highest investment grade, yesterday, saying the country’s “fiscal and foreign exchange reserve buffers remain sizeable,” giving authorities time to implement some reforms.
A negative outlook means there is a “a higher likelihood of a rating change over the medium term”, Moody’s said. A downgrade for Chinese bonds would increase borrowing costs for Beijing in the international markets.
The shift from stable to negative drew a swift rebuke from state media news agency Xinhua, which accused Moody’s of “shortsightedness” over China’s fiscal strength. Chinese investors took the news in their stride as they spent heavily on real estate and resources shares to help stock markets rise more than 4 per cent, their best day in four months.
Investors and analysts will look to China’s brief annual session of its parliament, starting on Saturday, for policy announcements to address the economic risks and challenges cited by Moody’s.
Advertisement
“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,” the agency said. “Government debt would increase more sharply than we currently expect.”
Moody’s estimated that government debt had jumped to 40.6 per cent of GDP by the end of 2015, from 32.5 per cent in 2012. “We expect a further increase to 43.0 per cent by 2017, consistent with an accommodative fiscal stance that will likely involve higher government spending and possible reductions in the overall tax burden,” it said.
The agency’s move “reflects a lingering pessimism over the Chinese economy among some overseas institutions, a miscalculation due to a lack of vision on China’s fiscal stability,” Xinhua argued in an opinion piece. Ongoing fiscal strength is supported by factors including China’s high savings rate and Beijing’s ability to pay off its debt, it said.
While China’s currency reserves have fallen by $762 billion over the last 18 months to stand at $3.2 trillion in January, they still account for up to 32 per cent of China’s GDP as at the end of 2015, it said.