Moody's affirms China rating, cuts outlook

Moody's Investors Service affirmed China's government bond rating of Aa3 Tuesday but lowered the outlook to stable from positive, the second downward revision after Fitch Ratings cut the country's local currency credit rating by one notch last week.

Moody's said it affirmed the Aa3 rating because of China's continued economic growth, strong central government finances and its exceptionally strong external payments position.

However, "progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth," it said in an e-mail sent to the Global Times Tuesday.

Also, the vulnerable property market weakens the finances of local governments, which are reliant on land sales, showing a greater need for central government support and dragging on the transition to a more balanced and moderately growing economy, Moody's said.

The total fiscal revenues of local governments grew by 13.7 percent year-on-year on average in the first quarter, mainly boosted by land sales, according to data released by the Ministry of Finance Monday.

The National Audit Office identified 10.7 trillion yuan ($1.7 trillion) in local level liabilities by the end of 2010, equivalent to 27 percent of China's GDP at that time.

Local government debt was estimated to total 15.3 trillion yuan in 2012 and is expected to reach 16.3 trillion yuan by the end of this year, Liu Yuhui, chief economist at Huatai Securities, wrote in a recent research report.

Fitch Ratings downgraded China's local currency credit rating by one notch to A+ from AA- on April 9, citing similar concerns about local government liabilities and fast-expanding credit through opaque shadow banking activities.

A large part of the credit for local government projects is provided by shadow banking activities, Charlene Chu, head of China Financial Institutions with Fitch Ratings, said at a recent media teleconference.

To curb the potential default risks from local government financing vehicles (LGFVs), the banking regulator recently asked commercial banks to control their lending to these government-linked bodies, the National Business Daily reported Tuesday, citing an internal document from the China Banking Regulatory Commission (CBRC).

Banks are not allowed to extend new credit to an LGFV if its cash flow is not enough to cover its debt or if it has a debt-to-asset ratio above 80 percent, according to the CBRC document.

The CBRC also issued a notice on March 27 asking banks to clearly link wealth management products, an increasingly popular area of shadow banking, with specific assets.

Banks must disclose who will ultimately use the funds and for what purpose, and each product must be audited, according to the notice.

"The rating agencies' change of China's credit rating and outlook doesn't change my optimistic view on the country's long-term prospects," Chris Leung, senior economist at DBS Bank, told the Global Times Tuesday.