As a result, A3-rated bonds of the People's Republic of China and of other issuers domiciled in China were also on review, it said, while confirming the Prime-3 ceiling for short-term bank deposits. "The decision to place these ratings on review follows the change in rating outlook to negative from stable that was made in February 1998," Moody's said.

"Today's action was prompted by mounting pressures on China's external position from export weakness and declining foreign direct investment, both of which are important sources of economic growth in China," it said. While noting that China's sizeable official foreign exchange reserves and currentaccount surplus offered considerable support to the country's ratings, it said the effects on economic performance of a continued deep slump in regional economic and trade performance had to be assessed.

There were also concerns that recent fiscal and industrial policies made in the hope of sustaining economic growth and employment would complicate current reforms of the financial system and state-owned enterprises, it said.

The reforms were "an enormous task which would play a crucial role in determining the country's long-term economic and financial prospects", Moody's said. The outstanding A3-rated bonds of the Export-Import Bank of China, the Government of the People's Republic of China and the State-Development Bank of China were on review, it said.

Downgrade likely for Hong Kong

Meanwhile, Moody's Investor Services has also said that it would review Hongkong's foreign currency ceilings for a possible downgrade. Moody's said it had placed its A3 long-term foreign currency country ceilingsfor bonds and notes and for bank deposits and its prime-2 foreign currency ceilings for short-term debt-obligation and bank deposits in Hong Kong on review for possible downgrade. It said that the review would be conducted in conjuction with the agency's review of China's ratings, which was announced separately.

The review was being carried out as Hongkong's economy and financial markets were being "seriously" affected by the regional financial turbulence and by speculation against the Hongkong dollar which is pegged to the US dollar. It said confidence in the pegged exchange rate was also being hurt by market uncertainty over the future value of the Chinese currency.

Latin America also faces the axe

Moody's has also downgraded its ratings for debt owed by Latin America's largest economies, citing the effects of tighter foreign capital availability for emerging markets. For Brazil and Venezuela, foreign currency bonds were downgraded to B2 from B1 by Moody's Investor Service.

Brazil's andVenezuela's foreign currency bank deposits, and thus local-currency-denominated government bonds, were downgraded to CAA1.

For Mexico, Moody's put BA2 notes on credit-watch, with likely downgrading forecast. For Argentina, Moody's put BA3 notes on credit-watch, with likely downgrading forecast.

Moody's attributed its ratings changes to the view that prospects had worsened for fiscal adjustment programmes in the large Latin American economies, due to tightened foreign capital availability.

As foreign capital becomes scarcer and more expensive, Moody's said Brazil will be more vulnerable to sudden changes in investor confidence while Venezuela will be vulnerable to swings to oil prices.

As for mexico and argentina, though their Financial systems have grown stronger since 1995, they may suffer from a potential regional crisis as a result of current turmoil in world financial markets, Moody's said.