SHANGHAI • Moody's downgraded its outlook on Chinese government debt to "negative" from "stable" yesterday, citing uncertainty over the authorities' capacity to implement economic reforms, rising debt and falling reserves.
"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. Government debt would increase more sharply than we currently expect," the ratings agency said.
It said the downgrade was driven by expectations that China's fiscal strength will continue to decline, and the fall in its foreign exchange reserves which have shrunk by US$762 billion (S$1.1 trillion) over the past 18 months.
It also said policymakers' credibility was at risk of being undermined by incomplete implementation or partial reversals of some reforms. "Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty about policy priorities."
Moody's kept China's Aa3 rating, noting the country's sizeable reserves gave it time to implement reforms and gradually address economic imbalances. But it warned it could further downgrade China's rating if it saw slowing down of reforms needed to support sustainable growth and to protect the government's balance sheet.
"It's not a worrying sign yet, but rather a negative direction. That's what Moody's is flagging," said senior economist Trinh Nguyen at global asset manager Nataxis.
"But they have room to do this. They have one of the lowest government debt as a share of GDP in comparison to other emerging nations. And most importantly, as China has a current account surplus it can fund its own fiscal expansion."
A major rationale for the falling outlook, Moody's said, was the large stock of contingent sovereign liabilities such as state-owned corporations' debt, local government debt as well as the debt of big "policy" banks - the Agricultural Development Bank of China, China Development Bank and the Export-Import Bank of China.
High and rising levels of debt at state-owned firms raised the risk of either a sharp slowdown in economic growth, as debt servicing curbed other spending, or a marked deterioration of bank asset quality, Moody's said.