Singapore, November 11, 2010 -- Moody's Investors Service has today upgraded the Chinese government's
bond rating to Aa3 from A1 and is maintaining its positive outlook.
The action raises the government's foreign and local currency bond ratings
to Aa3 from A1, China's country ceilings for foreign and local currency
bank deposits to Aa3 from A1, and the ceilings for foreign and local
currency bonds to Aa3 from A1. The short-term foreign currency
rating remains at P-1 and is therefore unaffected.
The 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 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 and macroeconomic stability 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.
4. The exceptional strength of the external payments position which
provides a substantial buffer to global financial market turbulence and
that China's capital controls will help stem de-stabilizing
5. The expectation that trade and currency regime tensions will
be constructively managed between China and the US.
Moody's signaled its action today by changing the outlook on China's ratings
outlook to positive from stable on November 9, 2009 and by placing
the ratings on review for possible upgrade on October 8, 2010.
These actions were justified by events over the course of the past year,
during which China maintained a strong, but stable macroeconomic
"In particular, 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 is moderating
to a more sustainable rate of growth, which seems likely to be around
9-10 percent this year, and perhaps 8-9 percent in
2011," says Byrne. Although inflation is becoming a challenge,
it currently remains moderate, and the PBOC has taken tightening
measures in normalizing monetary policy.
The re-balancing of the Chinese economy emphasizing domestic consumption
and a somewhat tempered rate of economic growth, if sustained,
will also help ensure long-run macroeconomic stability.
Indeed, since last year, private consumption has been rising
even faster than nominal GDP growth. Moody's expects that
trend to intensify with a more rapid rise in wages in the future.
The shift in growth policy is a plank of the upcoming 12th Five-Year
Plan, and we expect that the next generation of leadership,
when it assumes power in 2012, will follow this economic script.
We also expect another smooth, peaceful transfer of power,
as took place in 2002 when Mr. Hu Jintao was selected as the Communist
Party General Secretary.
The orchestration of an extraordinary economic stimulus program has so
far only modestly affected government finances. The budget deficit
will likely be contained within 3% of GDP this year and next.
Robust revenue growth will likely eclipse that of nominal GDP growth,
raising further the ratio of revenues to GDP.
Moreover, direct government debt will likely remain below or around
20% of GDP this year and next. Contingent liabilities on
the central government's balance sheet -- arising
from the credit surge in 2009 and sharp rises in financing vehicles associated
with local-level governments -- are evidently likely
to be manageable, based on information currently available.
Government financial strength is bolstered by an ability to finance budget
deficits readily and at low cost from the country's large pool of national
savings. Unlike the more heavily indebted governments in the Aa-rating
range, China does not rely on external financing. Rollover,
funding or deleveraging risks are accordingly reduced should the global
market appetite for sovereign risk deteriorate.
In addition, with net international financial assets greater than
50% of GDP -- bolstered by about $2.7
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.
Furthermore, we expect that future credit losses --
arising from the surge in lending in 2009, from exposures 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 still 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.
Domestic risks would also include an inability of the policy framework
to rebalance economic growth, while ensuring that trend growth is
maintained at a sufficient pace to ensure employment creation and social
Externals risks to trade relations may be the most threatening over the
near term, but conciliatory statements made by Vice Finance Minister
Wang Jun and US Treasury Secretary Timothy Geithner in the run-up
to the G20 summit in Seoul suggest that tensions over China's exchange
rate policy and the US Fed's monetary policy may not escalate out of control.
Nonetheless, domestic political pressures will likely keep such
issues on the front burner.
In addition, it is noteworthy that China is becoming more of a stakeholder
in the international system by assuming a larger role in the IMF,
and where its voting rights will rank third, behind only the US
and Japan. This also bodes well for a constructive approach to
policy differences between China and the US.
CREDIT TRIGGERS FOR A POSSIBLE UPGRADE
These would involve:
1. While to some degree concerns have been allayed through recent
discussions with Chinese authorities, greater assurance that local
government off-budget financial operations have been contained,
and are manageable without imposing a significant burden on the central
government's balance sheet and its financing costs would be credit positive.
2. The continued likelihood of success in macro-prudential
regulation of the banking sector and property sector to ensure systemic
stability without the need for extraordinary support from the government.
3. Signs of success in the policy shift signaled in the recently
concluded 5th Plenum of the 17th CPC Central Committee for a rebalancing
of China's growth model more towards one driven by consumption,
rather than predominantly driven by investment and exports. This
would also help fend off external, protectionist pressures.
PREVIOUS RATING ACTION & METHODOLOGY
The last rating action on the People's Republic of China was taken on
8 October 2010, when Moody's placed China's A1 government's
ratings on review for possible upgrade.
The principal methodology used in this rating was Sovereign Bond Ratings
published in September 2008.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Thomas J. Byrne
Senior Vice President - Regional Credit Officer
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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Moody's upgrades China's ratings to Aa3; maintains positive outlook
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