Bangkok--9 Nov--Moody's
Moody's Investors Service has changed China's ratings outlook to positive from stable in light of the country's resilient, robust and relatively stable macroeconomic performance during the turbulence of the past year, and is also taking the view that its strong credit fundamentals will likely resume an improving trend as its economy emerges from the effects of the global recession.
The rating action affects the government's A1 foreign and local currency bond ratings, as well as China's A1 country ceilings for foreign and local currency bank deposits, and for its A1 ceilings for foreign and local currency bonds. These ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country. The short-term foreign currency rating remains at P-1.
"The Chinese authorities are successfully steering the economy through the turbulence of the global financial crisis and recession, and furthermore, they seem likely to remain vigilant to protect systemic stability from future threats and challenges," says Tom Byrne, a Moody's Senior Vice President.
"The country's very strong international investment position has insulated it from the global financial crisis and reduced to a negligible level the risk that China could face a future balance of payments crisis," says Byrne. "With net foreign assets equal to 36% of GDP -- bolstered by more than $2 trillion in official foreign exchange holdings
-- only a handful of highly rated advanced industrial economies, such as Norway, Switzerland, Japan, Hong Kong and Singapore, have a stronger international investment position than China."
"While the authorities have been orchestrating a huge economic stimulus program in response to the global crisis, the effects on government finances have been modest and do not appear to pose unmanageable risks to the government's very high financial strength," says Byrne.
With a policy intention to contain the budget deficit to 3% of GDP this year and in 2010 and with a target of keeping general government debt below 20% of GDP, government debt will stay low, as well as affordable and finance-able, with good prospects for a resumption of the downward trajectory in the debt level over the medium term.
Moreover, China's banking system is emerging from the crisis in a relatively strong position, and will likely not pose any sizable contingent liability risk to the government's balance sheet. Not only does the financial system's strong, net foreign asset position offer considerable protection from external shocks, but the earnings power, loan loss reserves, and capital adequacy levels of its largest banks appear strong enough to cope with the stress scenarios which could emerge from the credit boom that has been a key element of the government's stimulus policy.
Indeed, Moody's banking group on October 22 placed on review for possible upgrade the Bank Financial Strength Ratings of the country's three largest banks — Industrial and Commercial Bank (also the worlds' largest bank), China Construction Bank and the Bank of China.
In its decision, Moody's said that while China's economic recovery seems well established, underlying risks will be monitored, and further positive rating actions over the outlook horizon period of 12-18 months will hinge on continued macroeconomic and financial sector stability and on an assessment that China's state-sector-centric economic stimulus program has not distorted long-term growth prospects, or given rise to destabilizing asset bubbles.
While China's ability to maintain its exceptionally strong external payments position is unlikely to be impaired, Moody's will monitor closely budgetary developments and whether the economic stimulus program may lead to the build-up of a significant level of contingent fiscal liabilities. Such liabilities could emerge from provincial- and local government-level finances, and whose off-budget interventions are not well understood and need closer scrutiny.
Moody's further notes that the maintenance of strong public-sector finances will be necessary to ensure that China has ample resources to accommodate future growth in social welfare expenditures to ensure a "harmonious society."
The last rating action on the People's Republic of China was taken on 26 July 2007, when Moody's raised China's ratings to A1 from A2.
The principal methodology used in rating China was Moody's Sovereign Bond Ratings published in September 2008 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab.
Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.
Press releases of other ratings affected by this action will follow separately.
Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Singapore Pte. Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308
New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
London
Pierre Cailleteau
Managing Director
Sovereign Risk Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454