Moody's confirms China Aa3 rating, outlook positive

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China's sovereign rating outlook remains positive, supported by favourable medium-term growth prospects and strong government debt dynamics, Moody's Investors Service said in a report on Thursday.

The ratings agency made no change to its Aa3 foreign and local currency bond ratings in the report, but said Beijing must retain tight control over local government finances and make reforms in the financial system to ensure rapid and stable economic growth for the rest of the decade.

"Rapid economic growth, coupled with low deficits and debt of the central government, have provided ample fiscal headroom to manage contingent risks in local government finances, or in the banking system," Moody's said in a statement accompanying the report.

Moody's said it expects China's real economic growth rate to ease to a range of between 7.5-8.5 per cent in 2012 and 2013 from the more heady 10.3 per cent pace of the last decade.

Economists polled by Reuters earlier this month expected the economy to grow 8.4 per cent this year. After a sluggish patch in the first quarter, growth is expected to rebound and steadily tick up to reach 8.7 per cent by April-June 2013.

Moody's also said China's trade and financial exposures to the continuing problems in the euro zone were moderate to low.

The report said China's large scale provided stability against shocks and offsets institutional weaknesses associated with the relatively low per capita income level in the world's second-biggest economy.

But it cautioned that institutional strength was moderate in comparison with most other highly-rated sovereigns and that more needed to be done to develop transparency.

"Political, economic, and financial event risks, which could prompt an abrupt, multi-notch downgrade, are considered as low and manageable, but not unimaginable," the Moody's statement said.

China took a milestone step in turning the yuan into a global currency this month by doubling the size of its trading band against the dollar to 1 per cent, pushing through a crucial reform to further liberalise its financial markets.

China's cabinet has also approved a pilot project in the coastal city of Wenzhou that could form the cornerstone of national financial sector reforms, with a plan to create a clutch of new institutions to bring private sector funds into China's state controlled banking system.

Sources in close, direct contact with the People's Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC) told Reuters last week that reforms are ready to be rushed out over the next 12 months to boost two-way capital flows, drive diversification of business finance and accelerate corporate currency hedging.

Premier Wen Jiabao last month staked his political legacy on reform to rebalance the economy at China's annual meeting of parliament.