China’s pursuit of growth target could extend economic imbalances – Moody’s

Maintaining robust economic growth will remain China’s priority in 2016, but some of the implications of this approach will be credit negative, Moody’s Ratings Agency has warned.

China’s relatively robust GDP growth of 6.9 percent in 2015 owed to significant monetary and fiscal stimulus — reflecting this focus — which prevented a sharper slowdown from 7.3 percent in 2014, it said in a research note.

“Policy support in the pursuit of growth targets is likely to persist in 2016, with the credit-negative effect of postponing deleveraging and the reduction of excess capacity,” Moody’s said in its just-released report on the Government of China, “Government of China: Stimulus Could Prolong Imbalances, a Credit Negative.”

Moody’s further said that it is becoming increasingly difficult for the government to achieve its growth target while steering the economy toward a more balanced structure in the face of financial markets volatility and persistent capital outflows.

“While sustainable rebalancing advances one aspect of the authorities’ policy agenda, a more rapid process would involve tackling excess capacity in parts of the industrial sector, with negative short-term consequences for the economy and potentially financial stability,” it said.

In Moody’s view, China’s authorities will allow the fiscal deficit to widen to around 2.5-3 percent of GDP in 2016, after 2.7 percent in 2015 and under 2 percent in the previous five years, to provide room for policy support. Government debt will rise slightly above 40 percentof GDP, still in line with similarly rated peers, it aded.

Moody’s concludes that while fiscal and monetary policy supported overall GDP growth last year, they have not raised profitability in those sectors that the economy is rebalancing away from, such as heavy industry.

As stimulus continues, it is likely to increase system-wide leverage — or at least prevent it from falling — without boosting profitability. This will raise debt serviceability risks.

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