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Moody's downgrades China's rating

SINGAPORE, May 24, 2017

Moody's Investors Service today downgraded China's long-term local currency and foreign currency issuer ratings to A1 from Aa3 and changed the outlook to stable from negative.
 
The downgrade reflects Moody's expectation that China's financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows, it said. 
 
While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government, it said.
 
The stable outlook reflects Moody's assessment that, at the A1 rating level, risks are balanced. The erosion in China's credit profile will be gradual and, it expects, eventually contained as reforms deepen. 
 
The strengths of its credit profile will allow the sovereign to remain resilient to negative shocks, with GDP growth likely to stay strong compared to other sovereigns, still considerable scope for policy to adapt to support the economy, and a largely closed capital account, Moody's said.
 
China's local currency and foreign currency senior unsecured debt ratings are downgraded to A1 from Aa3. The senior unsecured foreign currency shelf rating is also downgraded to (P)A1 from (P)Aa3.
 
China's local currency bond and deposit ceilings remain at Aa3. The foreign currency bond ceiling remains at Aa3. The foreign currency deposit ceiling is lowered to A1 from Aa3. China's short-term foreign currency bond and bank deposit ceilings remain Prime-1 (P-1), it said. 
 
RATINGS RATIONALE
Moody's expects that economy-wide leverage will increase further over the coming years. The planned reform programme is likely to slow, but not prevent, the rise in leverage. The importance the authorities attach to maintaining robust growth will result in sustained policy stimulus, given the growing structural impediments to achieving current growth targets. Such stimulus will contribute to rising debt across the economy as a whole, it said.
 
While China's GDP will remain very large, and growth will remain high compared to other sovereigns, potential growth is likely to fall in the coming years. The importance the Chinese authorities attach to growth suggests that the corresponding fall in official growth targets is likely to be more gradual, rendering the economy increasingly reliant on policy stimulus. At least over the near term, with monetary policy limited by the risk of fuelling renewed capital outflows, the burden of supporting growth will fall largely on fiscal policy, with spending by government and government-related entities -- including policy banks and state-owned enterprises (SOEs) -- rising.
 
GDP growth has decelerated in recent years from a peak of 10.6 per cent in 2010 to 6.7 per cent in 2016. This slowdown largely reflects a structural adjustment that we expect to continue. 
 
Looking ahead, Moody's expects China's growth potential to decline to close to 5 per cent over the next five years, for three reasons. First, capital stock formation will slow as investment accounts for a diminishing share of total expenditure. Second, the fall in the working age population that started in 2014 will accelerate. Third, it does not expect a reversal in the productivity slowdown that has taken place in the last few years, despite additional investment and higher skills.
 
Official GDP growth targets have also adjusted downwards gradually and the authorities' emphasis is progressively shifting towards the quality rather than the quantity of growth. However, the adjustment in official targets is unlikely to be as fast as the slowdown in potential growth as robust economic growth is essential to fulfilment of the current Five Year Plan and appears to be considered by the authorities as important for the maintenance of economic and social stability.
 
As a consequence, notwithstanding the moderate general government budget deficit in 2016 of around 3 per cent of GDP, the government's direct debt burden is expected to rise gradually towards 40% of GDP by 2018 and closer to 45% by the end of the decade, in line with the 2016 debt burden for the median of A-rated sovereigns (40.7%) and higher than the median of Aa-rated sovereigns (36.7%). - TradeArabia News Service



Tags: China | Rating | Moodys |

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