Moody's changes China's debt outlook to 'negative'

Moody's Investors Service on Wednesday lowered the outlook on China's government credit ratings to "negative" from "stable", citing governments' weakening of fiscal metrics and rising contingent liabilities.

Moody's attributed the change to three major factors: rising government debt in large and rising contingent liabilities on the government balance sheet; a continuing fall in reserve buffers due to capital outflows; uncertainty about the authorities' capacity to implement reforms to address imbalances in the economy.

According to the rating agency, Chinese government debt has risen markedly, to 40.6 percent of GDP at the end of 2015, from 32.5 percent in 2012. It expected a further increase to 43 percent by 2017, given an accommodative fiscal stance.

Moody's kept the Aa3 rating for Chinese government bonds unchanged, given China's fiscal and foreign exchange reserve buffers remain sizeable.

Moody's said it could revise the rating outlook to stable if government policy was likely to succeed in balancing competing priorities and thereby arrest the deterioration in China's fiscal metrics and reduce contingent liabilities, most likely through effective restructuring of SOEs in overcapacity sectors.

The change came after Standard&Poor's, another global rating agency, concluded that China's total debt, including government, corporate and household, has climbed to 232 percent of GDP. If the government continue to rely on credit expansion to bolster economic growth, S&P warned, it could downgrade its current sovereign AA- rating.