Moody's Downgrades China's Credit Outlook From Stable To Negative - Full Text

It is likely just a coincidence that just a month after we reported that China’s real consolidated debt/GDP was far greater than the 280% or so accepted conventionally, and was really up to 350% if not higher after the recent record loan issuance surge, moments ago Moody’s officially downgraded its outlook of China’s credit rating from stable to negative, citing three key risks:

The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet;

A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks;

Uncertainty about the authorities’ capacity to implement reforms – given the scale of reform challenges – to address imbalances in the economy.

While these were topical about a year ago for the financial media, and about 6 months ago for everyone else, we can’t help but notice that as expected Moody’s has said nothing at all about China’s biggest current risk factor – its collapsing labor market and surging unemployment. That’s ok, we are confident even the rating agencies will be up to speed with what we have been reporting since last November before the year is done.

Below is the full report:

Moody’s changes outlook on China’s Aa3 government bond rating to negative from stable; affirms Aa3 rating

Singapore, March 02, 2016 — Moody’s Investors Service has changed the outlook to negative from stable on China’s government credit ratings, while affirming the Aa3 long-term senior unsecured debt, issuer ratings, and (P)Aa3 senior unsecured shelf rating.

The key drivers of the outlook revision are:

The ongoing and prospective weakening of fiscal metrics, as reflected in rising government debt and in large and rising contingent liabilities on the government balance sheet.

A continuing fall in reserve buffers due to capital outflows, which highlight policy, currency and growth risks.

Uncertainty about the authorities’ capacity to implement reforms — given the scale of reform challenges — to address imbalances in the economy.

At the same time, China’s fiscal and foreign exchange reserve buffers remain sizeable, giving the authorities time to implement some reforms and gradually address imbalances in the economy. This underpins the decision to affirm China’s Aa3 rating.