Rating agency Moody’s on Monday raised China’s sovereign rating outlook from ‘stable’ to ‘positive’ and gave a ringing endorsement of the country’s “resilient, robust and relatively stable macroeconomic performance” through last year’s global financial crisis and recession.
“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,” Moody’s senior vice-president Tom Byrne said.
Monday’s rating action related to 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. Continued progress over the next 12-18 months could lead to a higher rating; the last time Moody’s raised China’s rating was in July 2007, from A2 to A1.
Not everyone shares Moody’s excessively optimistic outlook on the state of China’s public finances. Last week, rating agency Fitch expressed concern that deteriorating asset quality in China’s banking system could endanger the country’s sovereign rating. “China is the most obvious area of concern,” Fitch MD of Asia Pacific sovereign rating James McCormack said.
Even Moody’s did not formally revise China’s sovereign rating, only its outlook. That development may have to await confirmation that this year’s explosion of bank lending — in excess of $1.2 trillion — will not lead to a significant rise in non-performing loans (NPLs), noted Calyon chief economist Sebastien Barbe. Other analysts believe that China’s public debt is substantially higher than the central government debt of 5.3 trillion yuan (about $770 billion).
Moody’s too points to “underlying risks”, which it will monitor over the next 12-18 months. “Further positive rating actions… 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 destabilising asset bubbles.” It also pledged to “monitor closely” budgetary developments and whether the 4 trillion yuan ($585 billion) stimulus programme leads to a build-up of significant contingent fiscal liabilities.
Moody’s, however, sees “no unmanageable risks” to the government’s “very high financial strength.” Byrne said that “while the authorities have been orchestrating a huge economic stimulus programme in response to the global crisis, the effects on government finances have been modest.”
“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,” Byrne added.
Citing China’s high net foreign assets (36% of GDP) and more than $2 trillion in forex holdings, he noted that “only a handful of highly rated advanced industrial economies… have a stronger international investment position than China.”
Moody’s pointed to Beijing’s “policy intention” to contain budget deficit to 3% of GDP this year and in 2010 and to keep general government debt below 20% of GDP, and said these were good auguries that would keep government debt low “as well as affordable and finance-able”.
China’s banking system, Moody’s claimed, “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.” The financial system’s strong position offered considerable protection from external shocks, and additionally, 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,” it added.
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