Moody's cuts China outlook on eve of NPC, cites reform, fiscal risks

Moody's downgraded its outlook on Chinese government debt to "negative" from "stable" on March 2, citing uncertainty over authorities' capacity to implement economic reforms, rising debt and falling reserves.

The Moody's downgrade comes just days before the National People's Congress (NPC) is due to vote on China's 13th five year plan, a closely held development blueprint for the next five years, which policymakers began formally drafting in 2015.

Analysts will closely scrutinize the NPC's final text for hints on the likely trajectory of reform and policymakers' thinking on the appropriate growth strategy for China - key factors highlighted by Moody's in the report issued on March 2.

"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 unfavorable. Government debt would increase more sharply than we currently expect," Moody's said.

The agency said its rating committee had discussed China's status at a meeting on Feb. 9, during which the country's institutional and fiscal strength, as well as its susceptibility to event risk, were reviewed.

The agency said the downgrade was driven by expectations that China's fiscal strength will continue to decline, as well as the fall in its foreign exchange reserves which have shrunk by $762 billion over the last 18 months.

It also said that policymakers' credibility was at risk of being undermined by incomplete implementation or partial reversals of some reforms.

"Interventions in the equity and foreign exchange markets over the past year suggest that ensuring financial and economic stability is also an objective, but there is considerably uncertainty...