BEIJING, Nov 9 (Reuters) - A leading ratings agency on Monday gave China a vote of confidence ahead of a visit by U.S. President Barack Obama, praising the government's handling of the economy during the global financial crisis.
Moody's Investors Service said it had changed the outlook for China's A1 credit rating to positive from stable to reflect a "resilient, robust and relatively stable" economic performance and the "negligible" risk of a balance-of-payments meltdown.
Moody's also raised its outlook on Hong Kong's Aa2 rating to positive from stable. Analysts broadly said both moves were justified and came as little surprise.
"The Chinese authorities are successfully steering the economy through the turbulence of the global financial crisis and recession, and furthermore, they seem likely to remain vigilant to protect systemic stability from future threats and challenges," said Tom Byrne, a senior Moody's official.
Whether China wins a higher rating will depend on its continued progress over the next 12-18 months.
"Before we see an actual upgrade following the outlook, the rating agency would need more signs that the recent boom in lending is not going to be followed by a significant rise in non-performing loans. I think this is really the risk for the next two years," said Sebastien Barbe, chief economist for emerging markets at Calyon in Hong Kong.
For now, Moody's sounded a soothing note. It said China's banking system was emerging from the crisis in a relatively strong position and was unlikely to pose a major liability to the government's balance sheet.
"Given the huge Chinese foreign reserves and the proven ability to recapitalise the banking system starting in 1999, those were not sufficiently recognised by the ratings agencies. They are catching up with what is going on and catching up with reality," said Uwe Parpart, chief economist at Cantor Fitzgerald in Hong Kong.
China is sitting on $2.27 trillion in official foreign exchange reserves and has net foreign assets equal to 36 percent of gross domestic product.
"Only a handful of highly rated advanced industrial economies, such as Norway, Switzerland, Japan, Hong Kong and Singapore, have a stronger international investment position than China," Byrne said.
A FEW DOUBTS
What's more, the 4 trillion yuan ($586 billion) stimulus package that the government is implementing to cushion the crisis is having only a modest effect on China's public finances.
The government expects to keep its budget deficit to within 3 percent of GDP this year, with a target of limiting general government debt to below 20 percent of GDP.Â
Moody's move might encourage some foreign institutions to invest more money in Chinese assets through the Qualified Foreign Institutional Investors programme, said Zhang Rui, a fixed-income analyst with Shenyin and Wanguo Securities.
"But domestic ratings agencies and domestic investors are unlikely to be influenced by changes by a foreign ratings agency," Zhang said.
Moody's view is generally more optimistic than that of rival ratings agency Fitch, which expressed concern last week that deteriorating asset quality in the banking system could be a threat to China's sovereign rating. [ID:nHKG40244]
Yi Xianrong, a researcher with the Chinese Academy of Social Sciences, a top government think-tank in Beijing, also struck a note of caution.
Applying Western credit rating criteria to China risked overlooking long-term risks within the economy, he said.
"For instance, wealth is increasingly concentrated among a small group of people in China, and if the situation worsens it may cause massive social unrest and interrupt China's economic growth," Yi said.
