China’s economy looks unlikely to suffer a hard landing, but it still needs to undertake a variety of reforms to curb unchecked credit growth, says Moody’s Investors Service in a new report.
The rating agency says that China’s economy is recovering, and a hard landing is becoming a more and more unlikely and distant possibility. It says its belief in a recovery is supported by forward-looking indicators, such as the purchasing managers’ index, which point towards ongoing near-term economic expansion. Additionally, early signs of a rebalancing in the economy represent another positive, and stabilization in the global economy has boosted China’s export performance, it notes.
“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,” it says. “The favorable growth outlook is supported by policy easing and credit extension, particularly by the non-banking sectors, and should continue in 2014.”
Additionally, it says that China’s new leadership looks committed to financial sector, fiscal and structural reforms; and, it notes that an orderly transition to the next generation of political leaders has reduced uncertainty for investors.
However, Moody’s also warns that, to the extent that the rebound depends on an ample availability of financial credit, and if it is left unchecked, this could lead to credit pressures over time, perhaps offsetting the initial advantages for the economy.
The rating agency says that 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,” it says.
Moody’s says it 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.” It says that the authorities do appear committed to such reforms, but that the pace at which 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.”