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Credit Agency Casts Further Pall on China’s Economy

An employee works on an automobile assembly line at a factory in Qingdao, Shandong province, China, March 1, 2016. Activity in China's manufacturing sector shrank more sharply than expected in February.

China's struggling economy has prompted credit ratings agency Moody's to lower its outlook on the government's fiscal health from stable to negative Tuesday.

The New York-based agency said it downgraded Beijing's sovereign bonds due to increasing government debt, which jumped to an estimated 40.6 percent of gross domestic product at the end of 2015, compared to 32.5 percent of GDP in 2012.

Another factor in Moody's downgrade was China's declining foreign exchange reserves, which have lost about $762 billion since June 2014. The agency also expressed doubt about Chinese policymakers' ability and commitment to fully implement economic reforms.

But Moody's retained Beijing's current credit rating of Aa3, the fourth-highest investment grade. It cited a series of buffers against an economic downturn, including a moderate level of government debt, high domestic savings and the country’s substantial foreign exchange reserves, which are still the world's largest at $3.2 trillion.

The agency warned it could downgrade China's rating if the pace of reforms needed to sustain economic growth slows.

Challenging transition

The world's second-largest economy is struggling to transition from an export-driven economy to one sustained by consumer demand. The economy grew at an annual rate of 6.9 percent in 2015, its slowest pace in 25 years, because of manufacturing overcapacity and falling domestic and export orders.

Officials announced Tuesday that the Purchasing Manager's Index, which tracks activity in factories, dropped to 49.0 in February, down from the 49.4 figure posted the month before.

The recent news could spur policymakers in Beijing to launch another round of stimulus spending and boosting the money supply. The People's Bank of China late Monday announced it was cutting the amount of cash that banks must hold as reserves by as much as 50 basis points. The PBOC also injected an estimated $100 billion in cash into the banking system to spur new lending.

About credit ratings agencies

  • Such agencies gauge the ability of companies, or countries, to repay debt and make timely interest payments.
  • Agencies also assess the risk of default on bonds.
  • The three largest U.S. credit rating agencies are Standard & Poor’s, Moody’s Investors Service and Fitch Rating.