Moody's Lowers China Outlook over Local Debt and Lending Risks

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China's burgeoning local government debt and shady underground lending banks continue to pose a risk to the country's economy.

Today, Moody's Investors Services lowered its outlook for the Chinese economy from positive to stable. In a statement, Moody's said high borrowing by China's local government and growing bank lending were sources of concern.

These were the same reasons given by Fitch Ratings last week, when it cut China's long-term currency credit rating from AA-minus to A-plus.

According to the head of China's National Audit Office, China's local and central governments owed up to 18 trillion yuan, or around $3 trillion US dollars at the end of 2012.

Moody's said Chinese authorities have not done enough to reduce the risks associated with local government contingent liabilities by improving transparency.

Other reasons for lowering China's economic outlook include a, quote, "significantly greater-than-expected slowdown in economic growth." China's official GDP for the first quarter of this year missed market expectations, and also fell from the previous quarter.

Moody's kept its rating for China's government bonds at AA3. That rating isn't expected to go up over the next 12 to 18 months. The agency said while structure reforms are expected to improve credit, the scope and pace isn't enough to justify a ratings upgrade.

Moody's also said China's credit ratings would face pressure from a deterioration in government finances, coupled with a rise in social unrest. The agency warned against the risk of shadow banking, saying authorities need to ensure it doesn't destabilize the financial system.

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