Moody's Investors Service decided to change its outlook on China's government credit ratings by downgrading it from "stable" to "negative."
The agency provided a number of key drivers that have influenced the outlook revision. These include the ongoing and prospective weakening of the nation's fiscal metrics, the continuing drop in reserve buffers and the lack of confidence on the authorities' capacity to initiate reforms.
Moody's also mentioned the significant increase of China's government debt, which made up 40.6 percent of GDP toward the conclusion of 2015 compared to the estimated 32.5 percent recorded three years prior to it.
"We expect a further increase to 43.0 percent by 2017," says Moody's.
The drop in China's reserve buffers can be linked to the nation's external vulnerability. According to the agency, China saw a decline on its foreign exchange reserves during the last 18 months, which hit the $3.2 trillion mark in January 2016, a drop of $762 billion from the recorded peak that the nation enjoyed in June 2014.
Likewise, China's move to address its dropping foreign exchange reserves along with the downward pressure on its currency seemed to bring negative implications as far as the nation's economy and financial sectors are concerned.
These would include damaging the credibility of the authorities in terms of liberalizing the capital account, an integral reform element of the financial sector; increased tightening of China's liquidity conditions and the threat of fueling more capital outflows.
The third driver reflects the nation's institutional strength. Moody's said that the nation's institutions are facing numerous challenges brought by certain policy objectives of implementing reform, maintaining the nation's economic growth and mitigating the volatility of its market.
So far, Moody's retained the Aa3 rating of China and cited that the nation's sizeable reserves may just be enough to give it ample time to implement reforms and deal with its economic imbalances in a gradual fashion.
"The size of the buffers available to face current fiscal and capital outflow challenges allows for a gradual implementation of reform and therefore supports an affirmation of the rating at Aa3," adds Moody's.
At the same time, Moody's added that the buffers include government debt in a relatively moderate level that has low-cost financing. It also includes high domestic savings and foreign exchange reserves that are still in a substantial level.
