Beijing, March 2

Ratings agency Moody’s today cut its outlook on China’s sovereign bonds from stable to negative, warning of increasing government debt and further capital outflows and questioning Beijing’s ability to implement economic reforms.

Chinese government’s fiscal strength has weakened with borrowing increasing across the economy and financial system and stress mounting in state-owned enterprises, Moody’s Investors Service said.

It said continued weak growth was likely to see liabilities mount at policy banks — state-owned entities that fund projects according to government instructions — as authorities pushed investment to boost economic expansion.

A negative outlook means that there is ‘a higher likelihood of a rating change over the medium term’, Moody’s says on its website — and a downgrade of Chinese bonds would push up borrowing costs for Beijing in international markets.

The last time the US ratings agency revised its outlook on China’s government bonds was in April 2013, when it lowered its vision to stable from positive but left the rating itself unchanged.

Moody’s has rated Chinese bonds as Aa3, the fourth-highest investment grade, since November 2010. Government debt jumped to 40.6 per cent of GDP at the end of 2015 from 32.5 per cent in 2012, Moody’s estimated, forecasting it would rise to 43 per cent by next year as policymakers increased government spending and cut taxes to support the economy.

China’s economy grew 6.9 per cent last year, its weakest rate in a quarter of a century, and concerns over its outlook have mounted.

But Moody’s warned that fiscal and monetary policy support to achieve the government’s economic growth target, which it expected to be set at 6.5 per cent, ‘may slow planned reforms’.

“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 unfavourable,” it said, adding government debt would ‘increase more sharply than we currently expect’.

China’s foreign exchange reserves, the world’s largest, fell to $3.2 trillion in January, the lowest in more than three years.