Moodys Gives China Favourable A3 Rating

Moodys Investors Service in its latest country report on China has said that it will retain the countrys sovereign foreign currency rating at A3, a rating which the agency describes as one with many favourable attributes. In May this year, Moodys decided that Indias rating of Baa3, which is just above speculative grade, would not be reviewed even though it predicted a worsening of the countrys fiscal deficit in the near term.

Chinas sovereign foreign currency A3 rating for its Eurobonds is very well positioned in its rating category because of the nations favorable balance of payments position, prudent economic management, and prospects for strong economic growth over the medium term, according to the China annual report from Moodys.

Looking ahead, the rating agency says that Chinas chances of improving its credit quality may rest with the leadership. The distribution of posts to those who favour structural reform of the economy would be a positive indicator in this direction, Moodys states.

Initial policy statements suggest that the Communist Party is poised to accelerate restructuring of the state enterprise sector. If the authorities manage structural reforms as deftly and resolutely as they eliminated the macroeconomic imbalances of the early 1990s, China may experience a fundamental transformation of its socialist market economy, the report states, The rating agency says, however, that reform of state enterprises will have substantial repercussions on the financial sector, which is encumbered with non-performing policy loans. State-owned enterprises, which employ about 110 million people, have managed to evade drastic downsizing because of political risks posed by a sharp rise in unemployment.

Also, such employment is seen as a conduit of political patronage at both the local and national level. In addition, restructuring has been hampered by the lack of well-developed governmental institutions that will eventually take over the essential social services historically furnished by enterprises for their workers, said a press release from Moodys New York office.