Moody's downgrades China sovereign credit outlook to negative

investmentweek.co.uk:

Despite the downgrade, the country’s A1 rating was affirmed by Moody’s, which it said reflected the country’s financial and institutional resources.

The agency said today (5 December), that a variety of factors, including persistently lower medium-term economic growth and the ongoing downsizing of the property sector, meant it would be downgrading the country's outlook.

These economic problems will likely lead to greater government intervention in the economy, it said, as regional and local governments face lower revenue from land sale taxes and therefore are unable to properly invest in state-owned enterprises.

Moody's said China's central government will be pushed to provide financial support to local governments and state-owned enterprises, which it said risks crystallising contingent liabilities with greater costs than is consistent with the country's A1 rating.

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«To offset the diminished role of the property sector over the medium term, substantial and coordinated reforms will be needed for consumption and higher value-added production to drive growth,» it said.

«These trends underscore the increasing risks related to policy effectiveness, including the challenge to design and implement policies that support economic rebalancing while preventing moral hazard and containing the impact on the sovereign's balance sheet.»

Despite the downgrade, the country's A1 rating was affirmed by Moody's, which it said reflected the country's financial and institutional resources to manage the declining size of the property sector in an «orderly fashion».

"[China's] vast size and robust, albeit slowing, potential growth rate, support its high shock-absorption capacity," the