Debt to constrain China's credit rating

The mainland's sovereign credit rating is unlikely to be upgraded in the near future after Moody's Investors Service lowered the country's outlook from positive to stable last month.

The country's fundamentals were underpinned by an expected 7 to 8 per cent annual economic growth to 2017, but problems with local government debt and bank and non-bank credit would constrain its credit profile, Moody's said yesterday.

Ballooning local government debt and loans doled out by banks and the shadow banking system after the 2008-09 financial crisis prompted key ratings agencies to review the mainland's outlook. Moody's lowered outlook followed Fitch Ratings' decision to cut the long-term local-currency debt rating in April, citing dangers to financial stability.

The central government is expected to advance reform at a measured pace, and keep inflation well managed. That would support a stable outlook in the nation's credit rating, said Tom Byrne, a Moody's senior vice-president and head of the sovereign risk group in Asia.

"However, progress has been less than anticipated in making local government contingent liabilities more transparent and in reining in credit growth," Byrne said.

Official statistics on the latest size of local government debt are not available. Former finance minister Xiang Huaicheng estimated last month local government liabilities had exceeded 20 trillion yuan (HK$25.3 trillion), or 38.5 per cent of the nation's gross domestic product. It was a surge from the 10.7 trillion yuan of outstanding local liabilities at the end of 2010, after massive funds were pumped into local government financing vehicles (LGFV) to fund infrastructure projects.