Moody's has cut its outlook on China's sovereign bonds, warning of higher government debt and the likelihood of further capital outflows. It said reforms were required to remove structural deficiencies.
Moody's on Wednesday changed its outlook on China's government bonds from stable to negative, questioning Beijing's ability to implement necessary economic reforms.
A negative outlook means that there's a higher likelihood of a rating change over the medium term, with a potential downgrade of Chinese bonds to push up borrowing costs for Beijing in international markets.
The ratings agency said continued weak growth in the world's second-largest economy was likely to see liabilities mount at big "policy" banks, such as the China Development Bank or the Export-Import Bank of China, as the state-owned entities fund projects according to government instructions.
Moody's added it was concerned about a considerable increase of borrowing across the economy.
Government debt jumped to 40.6 percent of gross domestic product (GDP) at the end of 2015, up from 32.5 percent in 2012, Moody's estimated.
But China's foreign exchange reserves are still the world's largest, although they fell to $3.2 trillion (2.94 trillion euros) in January, hitting the lowest level in over three years.
Moody's kept China's credit rating at a solid Aa3, the fourth-highest investment grade, pointing to the large size of buffers in the nation's economy, including high domestic savings.
"In a largely closed financial system, buffer erosion would most likely be gradual, providing time to address key areas of reform," the agency argued.
hg/cjc (Reuters, AFP)