Moody's: China's Credit Strengths Are buffer Against Rebalancing Challenges

China's Aa3 rating and stable outlook are underpinned by the country's macroeconomic strengths and its fiscal and external cushions, according to Moody's Investors Service.

China's real GDP growth -- according to Moody's central scenario -- will edge down into the 6.5%-7.5% range this year and the next, while the longer-term growth outlook hinges on the success of credit tightening policies and the pace of reforms.

These views were outlined in Moody's just-released credit analysis on the Government of China, which elaborates on the country's credit profile in terms of economic strength, institutional strength, fiscal strength and susceptibility to event risk. These are the four main analytic factors in Moody's Sovereign Bond Rating Methodology.

The report notes that growth dividends from the structural reforms of the mid-1990s and China's accession to the World Trade Organization in 2001 have dissipated in the wake of the 2008-09 global financial crisis. Since then, investment-intensive economic growth has become became increasingly dependent on credit.

And comprehensive policy reforms announced by the Third Plenum of the 18th Central Committee in November 2013 indicate that while China's growth imperative remains strong, the Communist Party's new leadership recognizes that the economic model established two decades ago is producing diminishing returns and has raised social tensions, and that reforms will ensure continued macroeconomic and social stability.

Moody's evaluates the four Methodology factors on a scale which includes "very high," "high," "moderate," "low," and "very low." The report is an annual update for investors and does not constitute a rating action.

For economic strength, Moody's assigns a score of "very high," as it believes that even with continued moderation in growth, China's growth trajectory will remain relatively strong, and that a collapse in economic growth is unlikely.

China's score for institutional strength is "moderate", as the country's pragmatic and adaptable institutional framework has helped nurture rapid economic growth in recent decades, policy effectiveness will be increasingly challenged by evolving structural changes as reforms are implemented.

For fiscal strength, Moody's believes there is adequate headroom to absorb identified contingent liabilities and that the level and structure of government debt remains relatively sound.

As such, Moody's assigns a score of "very high" for fiscal strength.

In the assessment of event risk, financial risk is viewed as the most prominent, owing to the large scale and rapid expansion of China's financial system. However, the outlook on the rated banking system is stable and the risk of a financial system crisis is remote.

Moody's considers the probability of other event risks to be lower, including those in the domestic political, geopolitical, government liquidity and external balance of payments spheres.

As a result, Moody's assigns a score of "moderate" for susceptibility to event risk.

While the rating outlook is stable, Moody's notes that over time, upward rating pressure could arise if China receives a growth dividend from the advancement of the reforms outlined by the Third Plenum.

On the other hand, negative rating pressure could arise, with the greatest threats arising from the tail risks of a sharp slowdown in economic growth, such as precipitated by a disorderly unwinding of systemic leverage, a collapse in the property market or a significant deterioration in government finances from a large, material crystallization of contingent liabilities.


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