Singapore, October 08, 2010 -- The first sentence of the Previous Rating Action and Methodology section
is corrected to read, "The last rating action on the People's
Republic of China was taken on 9 November 2009, when Moody's changed
the outlook on the government's A1 ratings to positive from stable.".
Singapore, October 08, 2010 -- Moody's Investors
Service has today placed on review for possible upgrade the Chinese government's
bond rating of A1.
The main reasons for the decision are:
1. The resilient performance of the Chinese economy following the
onset of the global financial crisis, and expectations of continued
strong growth over the medium term.
2. The government's quick, determined and effective stimulus
program, the unwinding of which has begun.
3. The lack of erosion in central government financial credit fundamentals,
and the likely containment and effective management of prospective,
contingent losses arising from the extraordinary credit expansion in 2009.
The rating review affects the government's A1 foreign and local currency
bond ratings, China's A1 country ceilings for foreign and local
currency bank deposits, and its A1 ceilings for foreign and local
currency bonds. Moody's intends to conclude its review within a
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 and
is therefore unaffected.
RATIONALE FOR REVIEW FOR POSSIBLE UPGRADE
Moody's changed the outlook on China's ratings outlook to positive from
stable in November 2009 in recognition of the country's resilient and
strong macroeconomic performance in the wake of the turbulence from the
global financial crisis.
"We also took the view that the government's very strong credit fundamentals
would likely restart an improving trend as the Chinese economy emerges
and stabilizes from the effects of the global recession. In addition,
we premised our action on the ability of the Chinese authorities to protect
systemic stability from the underlying threats arising from the extraordinary
credit expansion evident in 2009," says Tom Byrne, a Moody's
Senior Vice President.
"The record of the past year demonstrates that China's policy response
to the 2008 crisis has been effective. Real GDP growth initially
rebounded rapidly in response to the stimulus measures, and has
recently moderated to a sustainable annual rate of around 8-9 percent,"
The gradual re-balancing of the Chinese economy now underway will
also help ensure long-run sustainability. Since last year,
private consumption has been rising as fast as, or even faster than
nominal GDP growth.
We expect that trend to intensify with a more rapid rise in wages in the
future. Moreover, as the government strengthens the country's
social safety net the need for pre-cautionary savings would be
At the same time, inflation remains moderate, with only food
prices exhibiting upward pressures. Unlike some advanced countries,
China does not have the challenge of dealing with deflationary pressures
arising from strained private-sector balance sheets and high government
The orchestration of an extraordinary economic stimulus program has so
far only modestly affected government finances. With a policy intention
to contain the budget deficit to 3% of GDP this year, and
with the likelihood that direct government debt will remain below 20%
of GDP, the government will likely be able to finance its deficits
readily and at low cost from the country's large pool of national savings.
China's exceptionally strong external position and the government's negligible
reliance on external financing have greatly lowered the country's vulnerability
to global financial market volatility, the threat of capital flow
reversals driven by deleveraging, and sudden shifts in credit or
market confidence. This situation represents an important credit
strength, and which has enabled China to withstand the pressures
that have damaged the credit fundamentals of more exposed countries,
not only during the global financial crisis, but also during the
Asian financial crisis more than a decade ago.
With net international financial assets equal to about 50% of GDP
-- bolstered by almost $2.5 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.
RISKS TO THE RATING AND ECONOMIC OUTLOOK
Although Moody's has concerns over the intrinsic, stand-alone
strength of China's banking system, we nonetheless recognize that
its largest banks have not been materially damaged by the global crisis.
Therefore, the dominant banks in the system will not likely pose
any sizable contingent liability risk to the government's balance sheet.
Moody's further expects that future credit losses -- arising
from the surge in lending in 2009, from exposure to the property
market, from risky loans to local government financing vehicles,
and from off-balance sheet operations in the "shadow" banking system
-- will be mostly absorbed by the banks themselves,
either from capital, or from future earnings.
However, transparency is lacking on the extent of such potential
losses. While uncertainty persists about the size and soundness
of off-balance sheet local government financing operations in particular,
we also believe that the central government has ample fiscal headroom
to absorb future losses.
Externals risks pose the most significant risks. A relapse into
recession in the US and EU would adversely affect China's export growth,
still a key driver of economic growth.
In addition, long-simmering trade frictions with the US may
be rising to a boil as legislation is advancing in the US Congress that
would allow for the imposition of countervailing duties on exports from
countries with a "fundamentally undervalued" currency. A severe
deterioration in the bilateral China-US trade relationship would
also have adverse effects on the tenuous global economic recovery,
elevating the risks of a double-dip global recession.
CREDIT TRIGGERS FOR A POSSIBLE UPGRADE
These would involve:
1. Greater assurance that local government off-budget financial
operations have been contained, and are manageable without imposing
a burden on the central government's balance sheet and its financing costs.
2. Continued likelihood of success in macro-prudential regulation
of the banking sector to ensure continued systemic stability without the
need for extraordinary support from the government.
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on the People's Republic of China was taken on
9 November 2009, when Moody's changed the outlook on the government's
A1 ratings to positive from stable.
The principal methodology used in rating the government of China is "Moody's
Sovereign Bond Methodology", which was published in 2008 and can
be found at 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
Press releases of other ratings affected by this action will follow separately.
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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MD - Sovereign Risk
Sovereign Risk Group
Moody's Investors Service
Moody's Investors Service Singapore Pte. Ltd.
Correction to Text, October 8, 2010 Release: Moody's places China's rating on review for possible upgrade
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