Moody's Investors Service downgraded China's credit outlook to stable from positive as the economy made less progress in reducing risks associated with local government debt and rapid credit growth.

Nonetheless, the agency affirmed its Aa3 bond ratings despite a downgrade by Fitch Ratings last week on the pretext of the huge indebtedness of local governments, which was the main reason behind today's outlook revision.

Moody's said, "Progress has been less than anticipated in the process of both reducing latent risks by making local government contingent liabilities more transparent and in reining in rapid credit growth; therefore, some of the upward pressure on the Aa3 rating has eased."

Further, credit-positive structural reforms under the new leadership are expected over time though their scope and pace might be insufficient over the course of the next 12-18 months to justify a rating upgrade, it said.

However, supported by continued robust economic growth against a background of low inflation, strong central government finances, and an exceptionally strong external payments position, Moody's observed that China's credit fundamentals remain consistent with a Aa3 rating.

Moreover, fiscal metrics of China are more favorable than those of other Aa-rated advanced countries. Its external assets were $1.8 trillion greater than its system-wide external liabilities.

According to Moody's, contingent liabilities are the main constraints to any further upward movement in the rating. In addition, volatility in the property market makes local government budgets vulnerable due to its increased dependence on land sales.

The ratings agency noted that another risk associated with credit growth is driven by non-bank and shadow banking system.

Data from People's Bank of China showed that financial institutions extended CNY 1.06 trillion in new yuan loans in March, significantly above the CNY 620 billion offered in local currency loans in February.

RTTNews