Moody's Investors Service rewarded China on Friday for a surging balance-of-payments surplus by upgrading its outlook for the country's foreign bonds.

Moody's said the change in outlook for China's A2 foreign currency bond rating to positive from stable also reflected China's success in holding down its overseas debt.

"Prospects are that China's external payments position will remain resilient to domestic and external pressures," Tom Byrne, a vice president at the ratings agency, said in a statement.

China has built up foreign currency reserves of US$925 billion, the largest stockpile in the world, as a result of intervention by the central bank to buy most of the dollars that flow into the country from its trade surplus and foreign direct investment.

The reserves are more than three times bigger than China's foreign debt, which stood at US$287.9 billion at the end of March.

"China's strong external position provides insulation from external shocks and allows the authorities time to introduce market-oriented reforms and restructure the banking system," Byrne said. Rival Standard & Poor's rates China a notch lower than Moody's at A-minus, but it too has a positive outlook.

Peter Morgan, chief Asia economist for HSBC in Hong Kong, said the move would potentially help Chinese banks to raise funds more easily and to lower their cost of capital.

But he said he was a little surprised by Moody's move because of concerns over the mountain of non-performing loans still souring China's banking system.

"But there has been quite a dramatic widening of China's current account balance over the past year ¡ª that could be one factor," Morgan said.

China's current account surplus in 2005 rose 133 percent to US$160.8 billion, or 7.2 percent of gross domestic product, helping to boost its overall balance-of-payments surplus to US$224 billion.

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