Moody's Investors Service upgraded China's government bond ratings on Thursday, citing its resilient economic performance and sound balance of payments.
Moody's raised China's government bond rating to Aa3 from A1 and maintained a positive outlook, it said in a statement.
The move followed a change in the rating outlook in November 2009 to positive from stable and a review for possible upgrade last month.
The prospect of China's strong economic growth over the medium term — backed by the two-year 4 trillion yuan ($600 billion) stimulus program launched in 2008 — and the country's solid external positions, justified the move, Moody's said.
Moody's expects China's economic growth to moderate to a more sustainable rate of around 9 percent to 10 percent this year, and perhaps 8 percent to 9 percent in 2011.
Inflation is becoming a challenge, but the People's Bank of China has taken tightening measures to tackle it, Moody's said.
The PBOC raised reserve requirements twice for some banks on Wednesday to mop up more of the cash that is coursing through the economy, two sources said on Thursday.
China's exceptionally strong external position, reinforced by its capital controls, would help the country to cope with global financial market volatility and capital inflows, the agency said.
The government's fiscal positions remained healthy, with the budget deficit likely to be contained within 3 percent of GDP this year and next, despite the economic stimulus, it said.
China's state-owned banks lent 9.6 trillion yuan last year, to complement the stimulus package that helped China ride out the global financial downturn.
Critics have voiced fears that a lot of those loans, especially those made to local governments, will turn sour, saddling the banks with heavy losses and possibly requiring the central government to organize a bailout.
But Moody's said China's largest banks have not been materially damaged by the global crisis and will be able to absorb the bulk of any credit losses themselves — either from capital or from future earnings.
"Therefore, the dominant banks in the system will not likely pose any sizable contingent liability risk to the government's balance sheet," the ratings agency said.
Still, China faces some long-term risks as it tries to rebalance the economy while ensuring strong growth and creating enough jobs to maintain social stability, Moody's said.
External risks would be the most threatening over the near term, including long-simmering trade frictions with the United States over the value of the yuan, it said.
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