Moody’s said that it is uncertain with the Chinese authorities’ capabilities to execute economic reforms. As a result, the government’s debt would balloon while reserves are expected to fall. Therefore, the rating agency slashed its outlook on China debt to ‘negative’ from ‘stable’. However, the rating agency has retained the rating of Aa3 after taking into consideration the sizeable reserves. The rating firm believes that it offers the Chinese an opportunity to implement reforms, as well as, address the economic imbalances gradually.
Ahead Of NPC Meet
Interestingly, Moody’s downgrade came a few days ahead of the National People’s Congress (NPC) to vote on the 13th Five Year Plan. That is a blueprint for the next five years involving the development of the country as the policymakers commenced its efforts to draft policy last year. The draft and the final text would provide the most likely way of reform, as well as, the policymakers’ idea on the growth tactics for the second largest economy in the world.
The rating agency said that in the absence of efficient and credible reforms, the GDP in China would slow more significantly. The American firm expects increased debt burden to hamper business investments as the demographics turn increasingly unfavorable. The agency fears that the debt burden would accelerate more sharply than the current expectations.
Review Of Various Factors
Moody’s said that its rating committee held discussions on February 9 to take stock of the current status of China including fiscal and instructional strength apart from the vulnerability to event risks. Currently, there were expectations that the fiscal strength would continue to drop thus forcing it to downgrade. It pointed out that as much as $762 billion foreign exchange reserves have got reduced in the last one and half years.
The rating agency said that the past year suggested that there was an ambiguity in the policy priorities. It was also the responsibility of the establishment to ensure that financial and economic stability as an objective to ensure interventions in the foreign exchange and stock markets. Moody’s also found the credibility at risk as far as the policymakers’ were concerned by pointing out the partial reversal and incomplete execution of certain reforms.