China’s policy stimulus does not address structural challenges, says Moody’s

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While China’s GDP growth will continue to receive strong government policy stimulus support, structural challenges posed by high corporate leverage remain unaddressed, Moody’s Investors Service’s said in its latest issue of Inside China.

The report also says that China’s robust GDP growth—targeted at 6.5 percent-7.0 percent—will be supported by fiscal easing, as reflected in a widening of the deficit to 3.0 percent of GDP.

As a result, government debt will increase gradually. Monetary accommodation will also be maintained, as reflected in the fact that the growth target for the monetary base is markedly in excess of nominal GDP growth.

The data released in China on economic developments in early 2016 also point to direct and indirect stimulus support to the Chinese economy, the report said.

In particular, it pointed out, investment by state-owned enterprises was 23.3 percent higher during the three months between January and March 2016 (Q1 2016) compared with Q1 2015.

Moody’s report said that without increasingly large stimulus, China’s economic growth will likely slip below target, adding that policy stimulus will likely maintain GDP growth around the government’s target range in the short term.

However, these short-term stimulus measures do not address the economy’s structural challenges. Rather, the increasing reliance on credit-financed investment further raises leverage in the corporate sector. Such a situation will likely raise contingent liabilities for the government, the report pointed out.

Further monetary policy accommodation in China could also be associated with continued capital outflows and downward pressure on the exchange rate, unless offsetting actions are taken, it said.

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