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Moody's highlights China's economic strengths but warns of credit challenges

Moody's said while China's credit profile reflects a number of strengths, the country also faces credit challenges. These include calibrating de-risking, deleveraging in the financial and real economies and improving capital allocation.

Moody's said the scale and growth of the economy supports China's "very high" economic strength score, which is offset by such challenges as high economy-wide leverage and excess capacity in certain sectors. China's economic structure continues to change as more activity is focused on higher value-added sectors like automobiles and electronic equipment, which have higher growth potential.

The country's "moderate" institutional strength shows the extent of challenges that the authorities face in containing the increase in leverage while maintaining stable and strong growth, along with economic and financial stability.

China's "very high" fiscal strength reflected the country's sizable domestic savings, robust debt affordability and minimal reliance on external funding against its large contingent liabilities and growing government debt burden.

Moody's gave China a "moderate score" for susceptibility to event risk in its assessment of the banking sector. Moody's said it expects government support for major banks to remain robust, which will largely contribute as a stabilizing factor for the banking system. Meanwhile, it expects support for smaller banks to be more selective after the implementation of a deposit insurance scheme.