Moody's Investors Service downgraded its outlook for China's Aa3 government bond rating to negative from stable, even as the rating agency affirmed that the country retains considerable resources to meet its economic challenges.
In a rating action issued Wednesday, Moody's attributed the negative outlook to growing pressures on the government's fiscal strength, the decline in foreign-exchange reserves and questions about the ability of the country's institutions to pursue needed reforms while maintaining economic growth and market stability.
Aa3 is Moody's fourth highest rating, denoting high quality and very low credit risk.
Wednesday's rating action said “the first driver of the negative outlook on China's ratings related to the government's fiscal strength, which has weakened and which we expect to diminish further, albeit from very high levels.”
Marie Diron, a senior vice president/manager with the sovereign risk group at Moody's Investors Service Singapore, said in a telephone interview that China's fiscal policy should remain accommodative, with government debt as a percentage of gross domestic product likely to rise to 43% by 2017 from 40.6% at the end of 2015, but whether China's outlook improves or deteriorates as a result will depend on what underpins that rise in debt.
If China is providing fiscal support to offset the negative impact of reform, that could be positive, she said. By contrast, if debt is used to provide a slowing economy with fiscal policy support, without accompanying reforms, “we would take that as a negative signal,” she said.
Moody's said it expects a gradual slowing of China's economy, with GDP likely to average 6.3% growth for the five years through 2019.