Chinese Flag in Shanghai
The company has put the downgrade down to the predication that China will continue to see declines in areas such as fiscal strength and in its foreign exchange reserves.

Moody’s, the bond credit rating investor service, on Wednesday has downgraded the Chinese government’s debt forecast from a “stable” rating to a “negative” one, due to concerns about the government’s ability to establish economic reforms, their increasing debts and declining reserves.

A spokesperson for the investment agency stated:

“Without credible and efficient reforms, China’s GDP growth would slow more markedly as a high debt burden dampens business investment and demographics turn increasingly unfavorable. Government debt would increase more sharply than we currently expect.”

In a meeting on February 9th Moody’s rating committee had evaluated the outlook for China including the country’s fiscal strength and its ability to withstand event risks.

The company has put the downgrade down to the predication that China will continue to see declines in areas such as fiscal strength and in its foreign exchange reserves. Its reserves have been reduced by $762 billion in the past 18 months.

Moody’s also highlighted the fact that China’s policymakers had been failing to establish or in part reversing some reforms – actions which threaten the credibility of the authorities and undermine them:

“Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty about policy priorities.”

However, China’s Aa3 rating was maintained by the ratings company as China’s large reserves allow enough time to enforce reforms and eventually deal with any economic variations.

But it did not disregard the fact that China’s rating could potentially be further downgraded  if it failed to enforce the reforms required to enable sustainable growth and safeguard the government’s balance sheets.

Senior economist for Nataxis, Trinh Nguyen said:

“It’s not a worrying sign yet, but rather a negative direction. That’s what Moody’s is flagging. But they have room to do this. They have one of the lowest government debt as a share of GDP in comparison to other emerging nations, and most importantly, as China has a current account surplus it can fund its own fiscal expansion.”

The market did not appear to respond to the updated outlook change; however the price of insurance against a potential default in debt payments increased slightly.

Senior economist at AXA Investment Managers, Aidan Yao also added that:

“The drivers – local government debt, capital outflows, falling reserves and concerns on the progress of reforms – are all well recognized by investors and a lot of them have arguably already been priced in.”

Moody’s had reported China’s actual government debt at 40.6 per cent of GDP late last year, whilst Standard & Poor reported in July that debt for the country had increased, in 2014, to 160 per cent of GDP – double the United States’ figures.