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LEAD: S&P raises China's foreign currency ratings

HONG KONG, Feb. 18 Kyodo

(EDS: ADDS DETAIL)

Standard & Poor's said Wednesday it has raised both long-term and short-term foreign currency ratings on China by one notch, respectively, to BBB plus and A2 with a positive outlook.

''The upgrade reflects China's more resilient economy after sustained structural reform, and the government's broader revenue base, which relieves spending pressure and provides room for maneuver in pushing ahead with ongoing reform,'' the U.S.-based international credit rating agency said in a statement.

The positive outlook on China's ratings reflects an expectation of acceleration in the pace of economic reform, S&P said.

With the reform progress, China's economy has been boosted, becoming more market-oriented and less dependent on government spending to sustain the growth, the agency said.

It highlighted the Chinese government's effort to strengthen the banking system, citing the recent US$45 billion capital injection into the state-owned Bank of China and the China Construction Bank that helped improve their capital adequacy ratios.

''A strengthening of market institutions will sustain growth and raise its potential, and continued reform of the state sector will moderate the contingent liabilities to the government,'' said Ping Chew, S&P's sovereign and public finance ratings group director.

''Of particular importance is the establishment of a better financial system,'' Chew said. ''This will curb new nonperforming loans and allocate resources more efficiently.''

The overall improvement in the economy, together with tax reform and tighter administration, has increased general government revenue to about 19% of gross domestic product (GDP) last year, S&P noted.

''This revenue growth allows the government to pad the social safety net to cushion fallout from further state-owned enterprise restructuring. It will also help to absorb bad debts from the banking system,'' Chew said.

China's external position, meanwhile, is strong, with high reserve coverage and the falling level of its debt and debt-servicing burden, S&P said.

The agency expected China's real GDP would be sustained above 7% per year.

However, S&P warned China's creditworthiness could be affected by the high level of consolidated government debt and the burden of contingent liabilities to the government.

If the Chinese government had to assume the stock of bad debts in the financial system, the cost of recapitalizing the financial system could surge general government debt to more than 100% of GDP from the present official debt level of 38%, S&P said.

Beijing also faces considerable challenges to build resilient and effective market institutions to enable sustainable economic growth, which in turn, will allow China's leadership to manage the strains of rapid economic modernization and social dislocation, it added.

Following the sovereign rating upgrade, S&P also elevated its long-term credit ratings on China Mobile (Hong Kong) Ltd., China National Offshore Oil Corp., and CNOOC Ltd. to BBB plus from BBB, with positive outlooks.

The long-term credit rating on Huaneng Power International Inc., a leading Chinese power producer, was raised to BBB plus from BBB with a stable outlook.

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