Moody's upgrades China's ratings to Aa3; maintains positive outlook

The action raises the government's foreign and local currency bond ratings to Aa3 from A1, China's country ceilings for foreign and local currency bank deposits to Aa3 from A1, and the ceilings for foreign and local currency bonds to Aa3 from A1.

The short-term foreign currency rating remains at P-1 and is therefore unaffected.

The ceilings act as a cap on ratings that can be assigned to the domestic or foreign currency obligations of other entities domiciled in the country.

In a statement, Moody’s said the upgrade was justified by China’s maintenance of a strong, but stable macroeconomic performance.

"In particular, we premised our action on the ability of the Chinese authorities to protect systemic stability from the underlying threats arising from the extraordinary credit expansion evident in 2009," said Tom Byrne, a Moody's Senior Vice President.

Moody’s cited the following reasons for their upgrade:

• The resilient performance of the Chinese economy following the onset of the global financial crisis, and expectations of continued strong growth and macroeconomic stability over the medium term.
• The government's quick, determined and effective stimulus program, the unwinding of which has begun.
• The lack of erosion in central government financial credit fundamentals, and the likely containment and effective management of prospective, contingent losses arising from the extraordinary credit expansion in 2009.
• The exceptional strength of the external payments position which provides a substantial buffer to global financial market turbulence and that China's capital controls will help stem de-stabilizing capital inflows.
• The expectation that trade and currency regime tensions will be constructively managed between China and the US.

"The record of the past year demonstrates that China's policy response to the 2008 crisis has been effective. Real GDP growth initially rebounded rapidly in response to the stimulus measures, and is moderating to a more sustainable rate of growth, which seems likely to be around 9-10 percent this year, and perhaps 8-9 percent in 2011," Byrne said.

The last rating action on the People's Republic of China was taken on 8 October 2010, when Moody's placed China's A1 government's ratings on review for possible upgrade.