Moody's cuts outlook on China to 'negative' citing weakening fiscal strength

March 2, 2016 | By | Reply More

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SINGAPORE: Moody’s Investors Service lowered its outlook on China to “negative” from “stable”, citing the government’s weak fiscal strength, falling currency reserves and uncertainty over the authorities’ capacity to implement reforms.

The government’s balance sheet is at risk of having to shoulder the liabilities of regional and local governments, policy banks and state-owned enterprises (SOEs), Moody’s said in a note on Wednesday (Mar 2).

Meanwhile, declines in the nation’s foreign exchange reserves amid capital outflows will have negative implications for the economy and financial sector, while failure to undertake reforms may undermine the credibility of policy makers, it said.

The rating agency, however, affirmed its “Aa3” rating on the country, citing China’s sizeable fiscal and foreign exchange reserve buffers.

“The size of the buffers available to face current fiscal and capital outflow challenges allows for a gradual implementation of reform and therefore supports an affirmation of the rating at Aa3. These buffers include a relatively moderate level of government debt, which is financed at low cost, and high domestic savings and still substantial foreign exchange reserves,” the ratings agency said.

“We expect a gradual economic slowdown, made possible by the capacity and willingness of the authorities to support growth. Moreover, although contingent liabilities are large, they do not pose an imminent risk to the government’s balance sheet. In a largely closed financial system, buffer erosion would most likely be gradual, providing time to address key areas of reform,”it added.

China’s economic growth slowed to a 25-year-low of 6.9 per cent in 2016.

Asian stocks were largely unaffected by the announcement, with Tokyo shares jumping more than 3 per cent in mid-morning trade.

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