China's Rating Not Jeopardized by Slower Growth

China's Aa3 sovereign bond ratings are supported by its economic and financial strength, which have not been jeopardized by the country's new era of slower growth, Moody's said on Tuesday.

The rating agency's outlook for the country's credit rating is stable.

China's economic growth ticked down to 7.7 percent in the first quarter, falling short of market expectations and suggested a continued tepid economic rebound for the world's second-largest economy.

"We see China's growth moderating further, but will remain well above global average over a five-year horizon, if not longer," Moody's said in its annual report.

After years of economic expansion at double-digit rates, China is believed to have entered a "new norm" of slower growth.

Moody's predicted China's GDP will grow 8 percent this year and 7.5 percent in 2014.

But the agency considered that the Chinese government's financial strength remained very high.

"Underpinning China's credit fundamental is continued robust economic growth against a backdrop of low inflation," Moody's said.

China's strong government's finances are reflected in its small budget deficits, moderate gross financing requirements, and a moderate on-budget debt burden slightly under 30 percent of GDP.

The Chinese government has considerable assets that can be used to help pay down the debt if necessary.

Neither the Chinese government nor the banking sector relies on external funding, reducing vulnerability to global financial market disturbances.

China's domestic savings rate is also one of the highest in the world. And the country has closed capital and foreign exchange reserves that could help prevent large swings in capital flows.

The agency, however, warned that local government debt and a surge in credit constitute risks, which could cause a sharper slowdown in growth.

After the 2008 global financial crisis, China's economic growth became more dependent on rapid expansion in credit, which led to ballooning government debt and rising non-performing loans.

In the latest official numbers available, China's National Audit Office put the debt of local governments at 10.7 trillion at the end of 2010.

Bank loans surged in the first three months of 2013, with monthly new loans hitting 1 trillion yuan (US$161.03 billion) in the two months of January and March.

Last month, China Banking Regulatory Commission issued guidance to strengthen the supervision of loans to local governments' financing vehicles, taking a more systemic approach to identifying and monitoring banks' potential exposure.

China needs to guard against potential risks in financial sectors and should keep a prudent monetary policy, according to an April 25 meeting of China's top leaders.

Moody's anticipated the Chinese government would carry out effective macro-prudential regulations and advance broad reforms that will help contain latent risks which could undermine China's new, more moderate growth path.