Moody’s lowers China credit rating outlook to stable

Beijing’s struggle to measure economy clouds outlook

BEIJING, April 16, (Agencies): Ratings agency Moody’s cut China’s credit outlook to stable from positive on Tuesday, citing concerns on the country’s opaque local government debt, fast bank lending growth and stalled economic reforms.

Moody’s kept China’s rating at Aa3, but the change in outlook means it does not expect to give China an upgrade over the next year to 18 months.

It came a day after Beijing announced growth in the world’s second-largest economy slowed to 7.7 percent in the first quarter, lower than market expectations.

“Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth,” Moody’s said in a statement.

“Credit-positive structural reforms under the new leadership are expected over time, but their scope and pace may not be sufficient over the course of the next 12-18 months to justify a rating upgrade,” it added.

The slowdown from growth of 7.9 percent in the last three months of 2012, which snapped seven straight quarters of deceleration, fuelled fears that recovery is faltering on subdued overseas demand and domestic woes.

Moody’s warned that “a significantly greater-than-anticipated slowdown in economic growth”, a deterioration in government finances and a rise in social unrest could add “downward pressure” on China’s credit rating.

Risks from China’s local government liabilities could “derail the transition to a more balanced and more moderately growing economy”, it said.

Beijing’s National Audit Office identified local-level debt at 10.7 trillion yuan ($1.7 trillion) at the end of 2010, or 27 percent of the Chinese economy in the year, the latest figures available. But the agency said the actual number could be even larger.

After China reported quarterly economic growth of 7.7 percent this week — far above anemic US and European performance — global markets reacted by falling, wiping billions of dollars off stock prices. The reason? Growth came in under the 8 percent expected by private sector forecasters who relied on Chinese trade and other data.

The market plunge highlighted complaints about the possible inaccuracy of Beijing’s official data and the intense, possibly excessive importance traders attach to a handful of Chinese economic indicators.

What matters more than a difference of a few tenths of a percentage point in growth from quarter to quarter is whether Chinese leaders are allowing the private sector to flourish by reducing the role of state industry in the economy, said Ben Simpfendorfer, managing director of Silk Road Associates, a consulting firm in Hong Kong.

“There is an obsession with these GDP numbers, and what really matters at this point is reform,” said Simpfendorfer, a former Royal Bank of Scotland economist.

China is watched especially closely because it is a major market for foreign goods from iron ore to smartphones and is relatively healthy, fueling hopes Chinese demand can help offset weakness in the US, Europe and Japan.

Confusion about how fast China is growing can hamper foreign and private companies in industries from construction to chemicals to consumer goods as they make plans for business and investment.

Beijing’s problems in keeping track of its economy stem in part from the fact that while it is surpassed only by the United States in size, China is growing and changing much faster than any rich country.

An understaffed bureaucracy inherited from the era of central planning is struggling to keep up with changes in trade, finance, manufacturing and city growth. Chinese companies have an incentive to avoid taxes or boost export rebates by misreporting sales and profits. Secrecy surrounding the collection and processing of official statistics leaves open the possibility they might be altered for political reasons.

Foreign and private companies look at government data with skepticism. Many rely on watching their own industries and markets more closely. The government still is the only source for most nationwide data, but a growing number of banks and research firms are developing their own based on surveys of companies and consumers.