Moody's maintains 'stable' rating for China's bonds

Moody's Investors Service kept its "stable" rating for China's foreign and local-currency bonds on Monday, citing the country's good economic fundamentals, but warned that systemic risks remain because of a credit surge and the opaque local governments' debt.

China's economic fundamentals are underpinned by robust economic growth, strong central government finances, and an exceptionally strong external-payments position, the credit ratings agency said in a report.

The agency forecast an 8 percent GDP growth for 2013 and said the country will maintain a 7 to 8 percent growth through 2017.

Meanwhile, inflation remains low to moderate and asset inflation is contained, which added to the positive outlook, it said.

But the agency noted that the contingent liabilities of local governments are still not transparent enough, and progress curbing the credit growth has been less than anticipated, which prevented the agency from raising the nation's rating level.

Official figures showed that the outstanding loans of local government financing vehicles, or LGFVs, were at 10.7 trillion yuan ($1.73 trillion) by the end of 2010, but no authoritative data have been released since.

Market watchers said they believe that the LGFVs have accumulated debt rapidly in 2011 and last year, with the size of the debt now estimated at between 12 and 20 trillion yuan, or between 23.1 and 38.5 percent of the country's GDP.

"The lack of transparency in the off-balance sheet debt of local governments adds uncertainty over potential contingent liabilities from unchecked investment," said Tom Byrne, a Moody's senior vice-president and head of the sovereign risk group in Asia.

China's credit boom is another source of concern. The country's M2, or broad money supply, had grown 16.1 percent by the end of April to hit 103.26 trillion yuan, or nearly 200 percent of GDP.

But this massive money injection has not been translated into desired growth, triggering concerns that the cash boom might not flow into the real economy, but into the shadow banking system instead.

Bin Hu, a senior analyst with Moody's, estimated the size of China's core shadow banking products at 21 trillion yuan at the end of 2012, and said that the annual growth rate of such products hit 32 percent between 2010 and 2012.

"The real problem is not how large its size is, but how quickly it has grown," Hu said.

These concerns prompted Moody's to revise China's rating outlook to "stable" from "positive" in April.

Xu Hongcai, a researcher with the China Center for International Educational Exchange, said that what worries him is that many State-owned enterprises are involved in the shadow banking system, as they resold loans they got from banks to other firms, which helped push up social financing.

Kai Hu, another Moody's senior analyst, said that a positive change seen is that the government is shifting from investing in industries with overcapacity, such as iron and non-ferrous metals, to more efficient industries such as transportation.

He said that in the past, China's membership in the World Trade Organization has served as a driving force behind the country's rapid economic rise. However, an equally important force could emerge and determine China's growth rate in the coming decade.

According to him, allowing private investors to join sectors that used to be dominated by SOEs, such as oil and gas, could be that driving force.

"Last week, the chairman of China National Petroleum Corp encouraged private capital to participate in projects in Xinjiang. If this kind of initiative is more widely adopted, the dynamics of private capital will be greatly unleashed," he added.