Credit rating stays despite slowdown

A major international agency maintained its positive outlook on China's sovereign credit rating but warned that the ongoing European debt crisis could still risk the granting of an upgrade.

Moody's Investor Service granted a positive outlook in 2010 and kept it on Monday. Moody's typically has a two-year time frame for making a ratings move after issuing an outlook.

Moody's said its outlook reflected China's long-term fiscal and growth trends that were "supportive" of a higher rating.

Cooling inflation also favors more scope for monetary policies to spur the economy, said Tom Byrne, Moody's senior vice-president and director of analysis for sovereign risk in Asia and the Middle East, on Monday.

The ratio of government debt to GDP could decline to somewhere between 30 to 35 percent, from more than 40 percent at present, he said.

Moody's changed its outlook on China's sovereign credit rating of A1 to positive in November 2009. One year later, it upgraded the rating to Aa3 with a positive outlook, the fourth-highest out of 10 investment-grade rankings.

It is the only one of the three biggest credit-rating agencies with a "positive outlook'', an indication the rating may be raised, according to Bloomberg.

The economy's fundamentals provide the basis for sustained and strong growth and prospects are good for further improvement in its credit profile, Byrne said.

Challenges from the 2008 to 2010 credit boom remain, but the economy has the fiscal and monetary space to offset such downside pressures, he added.

According to results of Moody's two bank stress tests, covering the next 18 months, the impact of deteriorating asset quality on the capitalization of lenders would be well contained even if GDP growth slowed to about 7 percent, with the non-performing loan ratio rising to 6 to 9 percent.

"But if the economy registers a growth rate of 4 or 5 percent, the banking system would be in trouble as the loan ratio would surge to as high as 20 percent," said Yvonne Zhang, vice-president at Moody's Investors Service (Beijing) Ltd.

The world's second-largest economy is loosing steam as GDP growth rate declined to 8.1 percent in the first quarter, the slowest rate in almost three years.

The Purchasing Managers' Index fell to 48.7 in May from 49.3 in April, signaling further slowdown.

"Since 2010, the economy has definitely been experiencing a softening in growth momentum. Systemic risks have been accumulating over the last five years and have been made worse by the stimulus — albeit much-needed at the time. Risks are sitting in the economic system, and they are now threatening to cause turmoil in the Chinese financial system," said Jeremy Stevens, economist at Standard Bank Group of South Africa.

And new challenges are arising externally as the drop in demand from Europe hits exports and economic activity, while trade tensions with the US are an aggravating factor.

Export competitiveness is also under pressure from rising wages and yuan appreciation, Byrne said.

He indicated that the fall of exports may influence whether Moody's raises the nation's sovereign credit rating.

Willem Buiter, chief economist with Citigroup, forecast that eurozone GDP may drop by 0.6 percent this year, and Greece is likely to exit the economic group early next year.

Such a scenario will have serious consequences for the eurozone and may presage a period of decades of low growth, he said.

The contraction of the European financial sector is more harmful than shrinking trade, Buiter said.

The State Council has pledged to concentrate on stabilizing economic growth and urged ministries to issue detailed regulations to attract private investment before June 5.

The National Development and Reform Commission, the top economic planner, accelerated its approval process for projects in April. On May 21, it announced approval for nearly one hundred projects, three times of its usual approval rate.

Zhang said she was concerned that a new round of stimulus measures would bring risks over the middle and long term.

And past measures may not always be applicable in current circumstances, Stevens, from the Standard Bank, said.

"The economy is diverse and complex and regional differences are more pronounced. This makes it more difficult for authorities to take the same kind of bold action as previously for fear of causing major disruption,'' Stevens said.