Ratings agency Moody’s Investors Service yesterday cut its outlook on China’s sovereign bonds from “stable” to “negative,” warning of increasing Chinese government debt and further capital outflows and questioning Beijing’s ability to implement economic reforms.
The government’s fiscal strength has weakened, with borrowing increasing across the economy and financial system and stress mounting in state-owned enterprises, Moody’s said in a statement.
Moody’s said that continued weak growth was likely to see liabilities mount at policy banks — state-owned entities that fund projects according to government instructions — as authorities pushed investment to boost economic expansion.
A negative outlook means that there is “a higher likelihood of a rating change over the medium term,” Moody’s said on its Web site — and a downgrade of Chinese bonds would push up borrowing costs for Beijing in international markets.
Government debt jumped from 32.5 percent in 2012 to 40.6 percent of GDP at the end of last year, Moody’s estimated, forecasting it would rise to 43 percent by next year as policymakers increased government spending and cut taxes to support the economy.
China’s economy grew 6.9 percent last year, its weakest rate in a quarter of a century.
However, Moody’s warned that fiscal and monetary policy support to achieve the government’s economic growth target, which it expected to be set at 6.5 percent, “may slow planned reforms.”
“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 unfavorable,” it said.
Foreign exchange reserves fell to US$3.2 trillion in January, the lowest in more than three years, official data showed.
“Their decline highlights the possibility that pressure on the exchange rate and weakening confidence in the ability of the authorities to maintain economic growth and implement reforms could fuel further capital outflows,” Moody’s said.
However, the agency kept China’s credit rating at “Aa3,” the fourth-highest investment grade, citing the large size of buffers in the Chinese economy, including high domestic savings.
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