Moody's: Stable bond credit rating on China

Business & Markets 2013
Written by Fatin Rasyiqah Mustaza of theedgemalaysia.com
Tuesday, 07 May 2013 12:24
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KUALA LUMPUR (May 7): Moody’s Investor Service reported that
China’s Aa3 foreign and local currency bond ratings remain supported
by relatively high economic strength and very high government financial
strength, which is not jeopardized by the country's new era of slower
growth.
In its annual report on China titled “Credit Analyst: China,” the Aa3 rating
is within anticipation that the government will implement effected macroprudential
regulations and advance broad reforms that will help contain
latent risks which could undermine China's new and more moderate
growth path.
According to Moody, these risks notably include contingent fiscal
liabilities at the local government level and rapid bank and non-bank
credit growth. The former presents more immediate risks to government finances and the banking sector.
In the annual report, Moody considers China's economic strength to be high, its institutional strength to be moderate, its
government financial strength to be very high and its susceptibility to event risk to be relatively low and manageable.
Moody projects that real gross domestic product (GDP) will grow around 8.0% this year and 7.5% next year. It also added
China's growth will moderate further, but will remain well above average global growth over a five-year horizon.
“China's strong general government finances are reflected in its small budget deficits, moderate gross financing requirements,
and a moderate on-budget debt burden slightly under 30% of GDP,” said Moody in its announcement.
“Contingent liabilities mainly associated with local government off-budget investment expenditure, could, however, add to the
government's debt burden should a further round of local-level liability crystallization occur,” added Moody.
Moody also added that China’s external position remains exceptionally strong. Neither the government nor the banking sector
relies on external funding, therefore reducing vulnerability to global financial market disturbances.
“Governance and transparency challenges constrain the sovereign's institutional strength at a moderate assessment,” it said.
The credit rating agency said China's susceptibility to political, domestic and geopolitical, financial sector or economic event
risks is low, although risks in the financial sector have risen.
“China's economic growth in the years after the 2008 global financial crisis has become more dependent on a relatively rapid
expansion in bank credit,” said Moody.
It added that rapid growth in non-bank credit also poses indirect risks to the banking sector, although it does not pose an
immediate risk to the balance sheets of the banks.
However, Moody's notes that recent banking and government debt crises have often been preceded by credit booms.
China's strengths, challenges, and risks are reflected in the sovereign's Aa3 rating and are captured in the Sovereign Bond
Rating Methodology's scorecard-indicated rating range of Aa2-A1.
Moody’s Aa3 and Aa2 bond rating grade signifies a high quality credit risk where as A1 has an upper medium credit risk.