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08 Mar 2016
Singapore, March 08, 2016 -- Moody's Investors Service says that China's (Aa3, negative)
policy makers appear to have set themselves three main policy objectives:
maintaining reasonably high rates of GDP growth, reforming and rebalancing
the economy, and ensuring financial and economic — and thereby
social — stability. The Government Work Report delivered
to the National People's Congress on 5 March made explicit reference
to each of these policy objectives.
"However, against the backdrop of China's slower economic
growth, capital outflows and rising corporate stress, it will
be increasingly difficult for these policy objectives to be achieved in
unison," says Michael Taylor, a Moody's Managing
Director and Chief Credit Officer for Asia Pacific.
"With the government having now given a strong commitment to a growth
target of between 6.5%-7.0%,
it seems unavoidable that one of the other policy objectives will assume
lesser priority. The most likely near-term casualty is reform
momentum."
"We believe that achieving even the lower end of the growth target
for 2016 is likely to require further substantial monetary and fiscal
stimulus, as evidenced by the 50-basis-point cut to
the required reserve ratio in February and the government's announcement
of a 3% fiscal deficit for this year", adds Taylor.
"This level of policy support is likely to frustrate the government's
ability to achieve at least one of its other objectives."
Moody's analysis is contained in its just-released report
titled "China Credit: Conflicts Between Policy Objectives Raise
Risk That Momentum on Reform Will Slow".
Moody's report points out that it will be difficult even to implement
two of the three objectives at any one time.
If the authorities choose to prioritize reform while trying to maintain
a growth target of in excess of 6.5%, the consequence
will be to sacrifice some degree of financial stability, and accept
a larger level of RMB depreciation, more widespread defaults,
and perhaps even some failures in the banking system.
Alternatively, a combination of growth and stability is also achievable,
at least for some time, but such a strategy will leave unaddressed
the deep imbalances in China's economy, such as elevated system
leverage and excess capacity. The risk is that the support necessary
to achieve 6.5% growth instead postpones the restructuring
of the SOE sector by creating artificially favorable demand and maintaining
accommodative financing conditions for loss-making, as well
as viable SOEs.
In addition, the implementation of the accommodative monetary policy
needed to support growth would lead to further downward pressure on the
RMB and would likely delay much-needed deleveraging.
The depreciation of the RMB can therefore only be avoided by stepping
back from the commitment to a more open capital account, thereby
substantially slowing the pace at which this and related reforms,
such as more market-based credit allocation, would be enacted.
A third combination would be to try to combine reform with financial stability,
but allow growth to decelerate below current targets. This combination
would involve the authorities eschewing fiscal or monetary stimulus to
revive investment in the pursuit of growth targets, using their
still substantial fiscal and reserves buffers to smooth currency and financial
market volatility, and proceeding with policy reforms.
Moody's points out that in view of the strength of the commitment
to China's growth target of 6.5%-7.0%,
and given the finite nature of foreign reserves, this third course
seems the least likely of the three combinations.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1018631
The report may also be found through this link to Moody's topic
page titled China — Reform and Rebalancing: http://www.moodys.com/chinarebalancing.
The topic page provides subscribers with a centralized source for Moody's
research related to key credit issues in China, as the country's
rebalancing story unfolds.
Recent Moody's publications relating to China Reform and Rebalancing include:
- Government of China -- Aa3 Negative: Update Following
Change in Outlook to Negative from Stable
- Asset Managers - Global: China Market's Gradual
Opening Is Credit Positive for Foreign Asset Managers
- Inside Renminbi Bonds - February 2016
- Chinese Banks: Chinese Banks' Strong Loan Growth
Raises Overall Financial Leverage, a Credit Negative
- Sub-Sovereign: Chinese Regional and Local Government
Debt and Finances Snapshot
- Chinese City Metro Companies: Links with Owner-Governments
Underpin Credit Quality (Presentation)
- China's Power Market: Sluggish Electricity Demand,
But Headroom Within Credit Profiles Provides Support
- Chinese Regional and Local Government Bond Program Continues,
a Credit Positive
- Property - China: PBOC Cuts Down-Payment
Requirement Further, a Credit Positive for Developers
- Inside China - February 2016
This publication does not announce a credit rating action. For
any credit ratings referenced in this publication, please see the
ratings tab on the issuer/entity page on www.moodys.com
for the most updated credit rating action information and rating history.
Rahul Ghosh
Vice President
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Michael Taylor
Managing Director
Credit Policy
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
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Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077
Moody's: Conflicts between China's main policy objectives raise risk that momentum on reform will slow
No Related Data.
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