Nov. 9 (Bloomberg) -- Moody’s Investors Service raised China’s ratings outlook to “positive” from “stable,” citing the government’s success in steering the nation through the global financial crisis.

The change affects the government’s A1 foreign and local currency bond ratings, Moody’s said in an e-mailed statement today. The ratings company also lifted Hong Kong’s outlook to positive from stable.

“The country’s very strong international investment position has insulated it from the global financial crisis and reduced to a negligible level the risk that China could face a future balance of payments crisis,” said Tom Byrne, a Moody’s senior vice president.

Record new lending and a 4 trillion yuan ($586 billion) stimulus package of spending on roads, power plants and low- cost housing has driven the rebound in the world’s third- biggest economy after exports collapsed. The nation’s foreign- currency reserves swelled to a record $2.273 trillion in September as the recovery attracted more money from abroad.

“It’s another reflection of the broad strengthening of the Chinese economy,” said David Cohen, an economist with Action Economics in Singapore. “The consensus is that the economy will grow more than 9 percent next year and that will be supportive of government finances.”

China’s stimulus program is having only a modest impact on government finances and doesn’t “pose unmanageable risks to the government’s very high financial strength,” Byrne said.

‘Affordable’ Debt

Government debt will stay low, “affordable and finance- able with good prospects for a resumption of the downward trajectory in the debt level over the medium term,” Moody’s added.

Bets are rising that China will allow its currency to strengthen as exports recover and major trading partners step up calls for appreciation to resume. Twelve-month non- deliverable forwards for the yuan climbed 0.36 percent to 6.6085 per dollar as of 3:33 p.m. in Shanghai, the biggest gain in three weeks.

European Central Bank President Jean-Claude Trichet and Japanese Vice Finance Minister Yoshihiko Noda last week called for the yuan to gain, while an International Monetary Fund report published Nov. 7 said the currency was “significantly undervalued.”

People’s Bank of China Governor Zhou Xiaochuan said Nov. 6 that “pressure from the international community to allow yuan appreciation is not that big.”

Hong Kong

In raising Hong Kong’s rating outlook, Moody’s cited China’s strong economic growth and said this lessened any “hypothetical risk” for the city emanating from the mainland.

Moody’s also raised from positive to stable the outlook on its ratings for seven Chinese banks.

The banks are Industrial and Commercial Bank of China Ltd., China Construction Bank Corp., Bank of China Ltd., Agricultural Bank of China, China Development Bank Corp., Export-Import Bank of China and Agricultural Development Bank of China.

China’s banking system, which has advanced a record $1.27 trillion in new loans this year, is emerging from the crisis in a relatively strong position and won’t likely pose any sizable risk to the government’s balance sheet, Moody’s said.

“The earnings power, loan loss reserves, and capital adequacy levels of its largest banks appear strong enough to cope with the stress scenarios which could emerge from the credit boom that has been a key element of the government’s stimulus policy,” Moody’s said.

Asset Bubble Risk

The risks of asset-price bubbles and misallocation of capital amid abundant liquidity “need to be addressed,” the World Bank said last week.

Moody’s A1 rating on China’s long-term, foreign-currency debt is the fifth-highest grade, equivalent to the A+ assessment held by Standard & Poor’s and Fitch Ratings, both of which hold a stable outlook.

Investors are signaling China’s debt rating is too low for an economy set to overtake Japan as the second biggest.

Contracts to insure China’s bonds are less expensive than those for Greece or Ireland, each deemed at least as safe by Moody’s, Standard & Poor’s or Fitch, after being pricier in 2008. They also are cheaper than all but five of 38 emerging- market credit-default swaps tracked by Bloomberg.

China’s government debt is higher and rising more rapidly than the headline official numbers suggest, in particular if debts accumulated by state-owned enterprises developing infrastructure under local governments are included, the World Bank said last week.

Moody’s said it will monitor closely whether the nation’s stimulus may lead to the build-up of contingent liabilities, which it said could emerge from local-government level finances.

To contact the reporter on this story: Kevin Hamlin in Beijing at khamlin@bloomberg.net

Last Updated: November 9, 2009 04:32 EST