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Moody's Puts China in Line for Possible Credit Upgrade
Published: Friday, 8 Oct 2010 | 12:36 AM ET Text Size
By: Reuters
Moody's Investors Service rewarded China on Friday for its response to
the global financial crisis by placing the government's bond rating on
review for a possible upgrade.
China's resilient economic performance, the prospect of continued strong
growth over the medium term and the likelihood that Beijing can handle
any losses from an unprecedented burst of bank lending in 2009 justified
the move, Moody's said.
China's foreign and local currency bonds are now graded A1.
Moody's, which has had a positive outlook on China since November 2009,
will decide within three months whether to raise the rating.
"The record of the past year demonstrates that China's policy response
to the 2008 crisis has been effective," Tom Byrne, a Moody's senior vice
president, said in a statement.
China's state-owned banks lent 9.6 trillion yuan ($1.4 trillion) last
year, about 30 percent of GDP, to complement a 4 trillion yuan fiscal
stimulus package unveiled in November 2008 to help China ride out the
global financial downturn.
Critics have voiced fears that a lot of those loans, especially those
made to local governments, will turn sour, saddling the banks with heavy
losses and possibly requiring the central government to organise a
bailout.
But Moody's said China's largest banks have not been materially damaged
by the global crisis and will be able to absorb the bulk of any credit
losses themselves — either from capital or from future earnings.
"Therefore, the dominant banks in the system will not likely pose any
sizable contingent liability risk to the government's balance sheet,"
the ratings agency said.
And that balance sheet is sturdy. With direct government debt likely to
remain below 20 percent of GDP, Beijing will be able to finance its
deficits readily and at low cost from the country's large pool of
national savings, Moody's said.
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What's more, China has an exceptionally strong external position that
has greatly lowered its vulnerability to global financial market
volatility, the threat of capital flow reversals and sudden shifts in
market confidence, the agency said.
China's external debt is negligible.
"With net international financial assets equal to about 50 percent 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," Moodys's said.
As such, China has been able to withstand the pressures that have
damaged the credit fundamentals of more exposed countries, not only
during the recent global meltdown but also during the 1997/98 Asian
financial crisis, it said.
Moody's identified external risks as the biggest threat facing China.
An economic relapse in the United States and Europe would hit Chinese
exports, which remain an important driver of growth, while long-
simmering trade frictions with the United States over the value of the
yuan may be rising to a boil.
"A severe deterioration in the bilateral China-U.S. trade relationship
would also have adverse effects on the tenuous global economic recovery,
elevating the risks of a double-dip global recession," Moody's said. |
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