April 16 Moody's Investors Service on Tuesday
affirmed China's government's bond rating of Aa3 but cut the
outlook to stable from positive, the second pessimistic revision
by a foreign ratings agency this month.
Last week, Fitch Ratings cut China's long-term local
currency credit rating to A-plus from AA-minus, citing concerns
about the risk that excessive local government borrowing posed
to the wider economy. Moody's referred to the same issue in
justifying its negative revision.
"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; therefore, some of the upward pressure on the Aa3 rating
has eased," it said.
Moody's said it affirmed the Aa3 rating because of China's
credit fundamentals, which have been underpinned by continued
robust economic growth, strong central government finances and
an exceptionally strong external payments position.
The report said more reform would be necessary to prevent a
buildup of pressures that could increase the risks of a hard
landing for the Chinese economy. But it credited China for
maintaining better fiscal metrics than Belgium or France, and
noted that China's massive international investment position
means its external assets exceed its domestic liabilities to the
tune of $1.8 trillion.
"Only a handful of highly rated advanced industrial
economies - such as Norway, Switzerland, Japan, Hong Kong and
Singapore - have a stronger international investment position."
China has seen rapid credit expansion as a result of
Beijing's stimulus in 2008-09 to counter the global crisis, but
the country has had trouble shaking off the hangover created by
sloppy asset allocation and investment bubbles resulting from
the flood of cheap cash.
Local government financing vehicles stand accused of making
investments in vanity projects and ghost cities that are
unlikely to produce sufficient returns to pay off bank loans.
The head of China's National Audit Office (NAO) recently
estimated that outstanding debt of local and central governments
was 15 to 18 trillion yuan -- equal to 29 to 35 percent of GDP
-- at the end of 2012.
But even as Beijing has moved to clean up balance sheets at
Chinese banks, borrowers and lenders have collaborated to
develop new forms of off-balance sheet financing that regulators
feel are both concealing and complicating the risk bad loans
pose to the wider economy.