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2011 Bond Ratings: Upgrades, Downgrades

China's Banking System

Rating: Outlook stable over the next 12 to 18 months

Rating Date: March 28

Moody's said its outlook on China's banking system is stable over the next 12 to 18 months based on the view that the country's economy will remain strong.

The strength will provide banks with ongoing opportunities to generate strong earnings, Moody's said.

"In this context, the key credit issue facing the system is the extent to which credit expansion can slow to a sustainable level that checks inflationary pressures, while simultaneously accommodating the country's 7% to 8% real GDP (gross domestic product) growth target for 2011 to 2015," said Yvonne Zhang, a Moody's vice president and senior analyst, in a report.

"Following the huge stimulus and growth in liquidity evident in 2009 and early 2010, monetary policy is now being gradually tightened." Moody's rates 16 banks in China, which together account for about 73% of the system's total assets.

The Moody's report also said it expects a rise in the banks' non-performing loans, a trend that typically follows very strong loan growth.

The sectors of most concern to Moody's include real estate-related sectors and loans to local government financing vehicles. In particular, Moody's concern focuses on credits that originated in 2009 and early 2010 when monetary policy was at its most accommodative and lending standards among banks were apparently relatively loose.

"Nonetheless, in our base case scenario, we expect a manageable rise in NPLs rather than a sharp deterioration in asset quality."

Chinese bank and real estate American Depositary Receipts and stocks were trading in mixed territory, mostly down, on the afternoon of March 28. Bank of China (BACHY) was flat at $13.90, China Construction Bank ( CICHY ) was falling 3.2% to $18.25, Industrial and Commercial Bank of China ( IDCBY ) was falling 0.9% to $16.23. Xinyuan Real Estate (XIN) was down 0.4% to $2.35 and China Housing & Land Development (CHLN) was rising 3% to $2.24.

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