Moody's cuts China's outlook to negative

Ratings agency Moody's has cut its outlook for China from "stable" to "negative," urging economic reforms to prevent a downgrade of the country’s credit rating.

Credit agency urges Beijing to stick to reforms or facing ratings downgrade

Workers weld steel frames for the Toyota Motor Corp. at a factory producing auto spare parts in Longquan in Chengdu in Sichuan province. Moody's has downgraded its outlook for China to negative, saying it has failed to carry out reforms. (China Colour Photo/Associated Press)

Ratings agency Moody's has cut its outlook for China from "stable" to "negative," urging economic reforms to prevent a downgrade of the country's credit rating.

The rating was left unchanged at Aa3, but the negative outlook reflects ongoing concern about the slowing economy.

The credit agency took Beijing to task for not completing reforms that would shift the economy from being driven by exports and manufacturing to being driven by internal consumption and services.

Moody's expressed concern about debt, most of it tied to government, including state-owned corporations' debt, local government debt, and the debt of big "policy" banks such as the Agricultural Development Bank of China, China Development Bank, and the Export-Import Bank of China.

"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," Moody's said in a note.

Looking for reform in 5-year plan

Moody's issued its report a day before the National People's Council meets to vote on China's 13th five year plan, its development plan for the next five years in the still government-planned and controlled economy.

The ratings agency says there is still time for China to enact a turnaround that will save it from stagnation.

Moody's pointed to China's intervention in the equity and foreign exchange markets over the past year as evidence that Beijing is reluctant to full open its economy.

Analysts will be looking at the targets and plans laid out in the five-year plan for signs of liberalization as well as stimulus plans.

China's economy, the second-biggest in the world, is growing at the slowest rate in 25 years, officially 6.9 per cent last year. That's led to a drop in commodity prices that has caused turmoil in financial markets worldwide.

With files from Reuters