Singapore, February 20, 2013 -- Moody's Investors Service says that China's economy is recovering
and a hard landing is becoming more and more an unlikely and distant possibility.
In addition, while Moody's considers the rebound in growth
as positive, it can also -- to the extent that it
depends on an ample availability of financial credit and if it is left
unchecked -- exert credit pressures over time, perhaps
offsetting the initial advantages for the economy.
At the same time, the Mainland's new leadership looks committed
to financial-sector, fiscal and structural reforms,
and the orderly transition to the country's fifth generation of
political leaders has reduced uncertainty for investors.
Moody's conclusion of the presence of a recovery is supported by
forward-looking indicators, such as the purchasing managers'
index, which point towards ongoing near-term economic expansion.
In addition, early signs of a rebalancing in the economy represent
another positive, as consumption contributed slightly more than
investment to overall GDP growth in 2012. Stabilization in the
global economy has boosted China's export performance and supports
the country's growth rebound.
Recent data releases also point to a rebound in economic activity and
suggest real GDP growth should climb to the upper half of the 7.5%
to 8.5% range Moody's forecasts for 2013, up
from 7.8% in 2012. The favorable growth outlook is
supported by policy easing and credit extension, particularly by
the non-banking sectors, and should continue in 2014.
Moody's conclusions were contained in its latest sovereign report
on China (Aa3 positive), titled "Improved Economic Outlook
for 2013 Is Underpinned by Policy Easing."
According to the report, China's economy enters 2013 on a
relatively stronger footing than 2012, as reflected in Moody's
revised growth forecast of 8.0%, up from real GDP
growth of 7.8% in 2012, with upside risks.
The authorities' pursuit of a policy of calibrated stimulus measures
has helped the rebound in aggregate demand in China, and which was
also reflected in the stronger retail sales and industrial output apparent
in the fourth quarter.
Recent developments suggest that fiscal policy has also become more expansionary
and is supporting growth, and will also ease budgetary pressures
at the local government level. Moody's estimates that China's
general government budget deficit was slightly higher at around 1.5%
of GDP in 2012, compared with 1.1% in 2011.
Moody's expects that fiscal policy will continue to provide more
support to growth this year and next, and that the budget deficit
will widen modestly and prudently.
However, while the development of the non-bank financial
system, including the banks' off-balance-sheet
wealth management products, is needed to help the financial system
diversify, growth from this sector was extraordinarily rapid in
2012.
Accordingly, if non-bank credit growth is left unchecked,
or regulators and financial institutions are unable to adequately manage
the associated risks, or moral hazard is allowed to emerge when
investors face losses, negative consequences could become apparent
for macroeconomic stability and the soundness of the banking system,
which remains the key mechanism for financial intermediation.
Given the evolving environment, Moody's believes that China's
new political leadership faces a new challenge in modulating the rapid
rise in aggregate financing to ensure long-term macro-economic
and financial system stability. To that end, the authorities
appear -- as recently indicated by the recent long-term
income distribution stragegy outlined by the State Council --
committed to furthering financial-sector, fiscal, and
structural reforms.
But the pace at which such reforms can be achieved will be crucial for
determining whether a rebalancing of the economy away from its heavy reliance
on investment, and increasingly on leverage, is successful.
Subscribers can access the report at http://www.moodys.com/research/China-Improved-Economic-Outlook-for-2013-Is-Underpinned-by-Policy--PBC_149827
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Steffen Wolf Dyck
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Singapore Pte. Ltd.
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MD - Sovereign Risk
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Moody's: China avoids hard landing; sustained growth depends on reforms