Europe Crisis Adds Concern to China Outlook at Moody’s

The drop in China’s exports caused by Europe’s debt crisis may affect whether Moody’s Investors Service raises the nation’s sovereign debt rating, said Tom Byrne, a senior vice president at the company.

Moody’s raised China’s foreign- and local-currency debt ratings to Aa3, the fourth-highest out of 10 investment-grade rankings, in November 2010. It is the only one of the three biggest credit-rating companies with a “positive” outlook, an indication the rating may be raised usually within two years.

“If you get a slowdown in exports, it feeds into domestic employment, into wages, into investment, so it would have wider ramifications,” Byrne, director of analysis for Moody’s sovereign risk group in Asia and the Middle East, said at a press briefing in Beijing today. “That’s the source of our new concern: What are the long-term implications of the continuing economic stress in Europe on China?”

The world’s second-biggest economy may expand at the slowest pace in 13 years in 2012 as the euro area’s worsening turmoil saps demand for Chinese goods and the government’s extended curbs on the property market cool domestic demand. Growth this quarter may drop below Premier Wen Jiabao’s full-year target of 7.5 percent and an investment stimulus of as much as 2 trillion yuan will be implemented to ensure a rebound in the second half, Credit Suisse Group AG said today.

Export Slump

China’s exports to the European Union, its biggest market, fell for a second month in April from a year earlier and rose 0.3 percent in the first four months of the year, government data show. Total overseas shipments increased 4.9 percent last month, the slowest pace since gains resumed in December 2009, excluding distortions caused by the timing of the nation’s Lunar New Year holiday.

When Moody’s raised China’s ratings with a positive outlook, it cited the nation’s financial strength and its ability to contain losses from an unprecedented credit boom aimed at cushioning the economy during the global financial crisis.

The outlook reflected China’s long-term fiscal and growth trends that looked “supportive” of a higher rating, said Byrne, who is based in Singapore. “However, there’s many challenges, and new risks have arisen, some that we saw, some have been intensified lately that add some uncertainty as to whether China realizes the long-term improvement in its credit fundamentals,” he said.

The fall in China’s inflation rate has been a “definite positive,” giving monetary authorities “a bit more scope” to stimulate the economy, Byrne said.

‘Strong’ Growth

Consumer prices rose 3.4 percent in April from a year earlier, below the government’s target for a third month. Economic growth may slow to 7.9 percent in the three months through June, the sixth quarterly slowdown, according to the median estimate in a Bloomberg News survey May 14-15.

Growth at 7 percent is still “strong” and barring “shocks” or “disturbances” state finances will improve, Byrne said. Government debt as a percentage of gross domestic product could decline to 30 percent to 35 percent, including contingent liabilities, from more than 40 percent currently, he said.

Still, Moody’s estimates that the debt of China’s local government investment vehicles, companies set up to borrow money to fund local-authority spending to build infrastructure, may not be reduced as some loans aren’t repaid and new credit is handed out.

A large portion of local government debt has been restructured or rolled over so the underlying cash flow from projects matches the term of loans, Yvonne Zhang, a Beijing-based vice president and senior analyst at Moody’s, said at the briefing.

Chinese banks have in many cases not revealed the source of funds used to pay off local government loans, said Christine Kuo, a Hong Kong-based senior credit officer at Moody’s.

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