Slower economic growth and rising credit risk are symptoms of the challenge that China (Aa3 stable) faces with structural rebalancing and are developments which have become more prominent since mid-2015, Moody’s Investors Service has said.
“Recent events have tended to illustrate the scale of the task confronting the authorities in managing the policy trade-offs involved in structural rebalancing,” said Jenny Shi, a Moody’s Managing Director and Country Manager for China.
Moody’s defines China’s rebalancing challenge as the need to engineer economic restructuring, policy reform, market liberalization, and slower credit uptake with the aim of shifting economic growth drivers away from state-led investment — all without sacrificing short-term macroeconomic stability.
“While there is evidence that the economy is gradually re-orientating away from state-led, capital-intensive growth, the trade-offs are slower headline economic expansion, accelerating capital outflows, and a less certain policy trajectory,” said Shi. “System leverage also continues to rise despite slower credit growth.”
Shi made her remarks in a speech on October 22 at a conference organized by the US China Business Council in Shanghai. She spoke on the themes of the outlook for China’s economy, corporate credit and the development of China’s bond market.
Moody’s believes that the government’s enduring concerns over growth will test its ability and willingness to implement long-term economic policy and market liberalization, objectives that could have negative short-term effects on growth.
In this context, the pace of structural reform — which is nevertheless proceeding — will remain gradual and subject to implementation delays or temporary reversals.
“As the authorities are — we believe — prioritizing stability in the current environment, the likelihood of a slowdown in policy reform is increasing,” said Shi. “In addition, our GDP growth forecasts for China of 6.8 per cent in 2015 and 6.3 per cent in 2016 are based on the assumption that the authorities will further step up monetary and fiscal measures in the face of weakening aggregate demand.”
Moody’s forecast of a further GDP slowdown is supported by the pervasive weakness of indicators, such as the country’s purchasing managers’ indices, credit growth, fixed asset investment and weakening labor market conditions.
To date, the policy stimulus measures that have been implemented have been broader-ranging and larger than what Moody’s had expected at the start of the year.
Such measures include ongoing monetary easing to help support onshore liquidity, including interest rate and reserve requirement ratio cuts, and fiscal support focused on supporting infrastructure and public works investment. (SH)