Moody's Investors Service, one of the world's leading ratings agencies, said Thursday it has raised China's bond rating from A1 to Aa3, the fourth highest ranking, and given it a positive outlook.
The move was based on the country's resilient economic performance and expectations of "continued strong growth and macroeconomic stability" over the medium term, Moody's said in a statement.
The company changed China's rating outlook from positive to stable in November 2009 and announced a rating review for possible upgrade last month.
Tom Byrne, senior vice president of Moody's, said one of the important drivers of the rating upgrade was the Chinese government's financial strength.
The strength of China's external payments position and expectations that trade and currency tensions between China and the United States will be "constructively managed" also contributed to the upgrade, the statement said.
"The record of the past year demonstrates that China's policy response to the 2008 crisis has been effective," said Byrne.
The company said that the re-balancing of the Chinese economy will help ensure long-run macroeconomic stability, noting that private consumption has been rising even faster than nominal GDP growth.
"Moody's expects that trend to intensify with a more rapid rise in wages in the future," said the statement.
China's gross domestic product (GDP) grew 9.6 percent in the third quarter of 2010 compared with the same period last year, slowed down from 11.9 percent in the first quarter and 10.3 percent in the second quarter.
"Real GDP growth initially rebounded rapidly in response to the stimulus measures, and is moderating to a more sustainable rate of growth," he said.
He expects China's economic growth to be around 9 to 10 percent this year and 8 to 9 percent in 2011.
On China's recent inflationary pressures, Byrne said the Chinese government has fairly effective policy responses and that inflation will not get out of control.
Official data showed Thursday the country's consumer price index (CPI), the major gauge of inflation, jumped to a 25-month high of 4.4 percent year on year in October.
In an effort to rein in excessive liquidity, the central bank raised benchmark interest rates last month and ordered banks to set aside more reserves late Wednesday.
"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 Byrne.
According to Byrne, China's capital controls will stem "hot money" inflows that may destabilize the economy.
Moody's warned of risks in the country's banking system, saying that there will be future credit losses resulting from the surge in lending last year, property market risks, and local government financing vehicles.
However, the company said most of the losses would be absorbed by the banks themselves either from capital or from future earnings, as China's largest banks have not been materially damaged by the global crisis.
The company also pointed out lack of transparency in the system and other long-term risks as China is striving to rebalance its economic growth, while maintaining strong growth to ensure employment creation and social stability.
Externals risks relating to trade relations may be the biggest threat to the Chinese economy in the near term, but tensions over China's exchange rate policy and the U.S. Fed's monetary policy may not escalate out of control, Moody's said.
Moody's also raised its rating on Hong Kong Special Administrative Region bonds from Aa2 from Aa1.
