Beijing must reform faster – Moody’sComment on this story
China must accelerate the pace of financial reform in coming months to sustain economic growth, ratings agency Moody’s Investors Service said yesterday, forecasting the Chinese economy will grow 7.5 percent each year from 2012 to 2014.
Expectations of steady expansion meant China was unlikely to suffer any economic “hard landing”, or abrupt slowdown, Moody’s said, but warned that the days of easy growth for the fastest-growing major economy were over.
Difficult financial reforms that made space for a more market-driven system had to be made to cut inefficiencies, it said. At the same time, China no longer enjoyed the wide berth it had before to bolster growth in unforeseen downturns.
“Without more market-based price signals driving the efficient allocation of capital and improving the competitive delivery of services, China’s trend growth rate will likely slow more rapidly than otherwise,” Moody’s said.
Crucial areas of reform included increasing market-based competition, improving regulation to allow greater certainty and transparency on future rules and decisions, and making China’s hulking state firms more efficient, Moody’s said.
While these changes should uncover new growth engines, it would not be smooth sailing.
The 4 trillion yuan (R5.7 trillion) stimulus from Beijing four years ago that led to explosive growth in China’s local government debt and rapid expansion of its banks, meant the country could no longer indulge in a credit binge if the economy swooned, Moody’s said.
Banks were especially imperilled by China’s previous credit extravagance, it said, noting that China’s total bank assets had doubled in the past four years, leaving them exposed to industries that were now mired in excess production capacity.
Total assets in China’s banking system were now worth 240 percent of the country’s gross domestic product at 113.3 trillion yuan, substantially higher than any other major emerging economy.
As a result, the agency judged Chinese bank asset quality to be “negative” for the next 12 to 18 months, even though it assessed the banking system to have a “stable” outlook in the period.
China’s stabilising economic growth had arrested the uptick in its banks’ bad loan ratio, Moody’s said, and there were no indications that asset quality would worsen materially in coming months.
China’s four biggest state-owned banks, which control about half of the country’s total bank assets, all have official non-performing loan ratios of below 1.5 percent, drawing criticisms from analysts who say that the numbers are too low and not to be trusted.
Christine Kuo, the vice-president of Moody’s Financial Institutions Group, said while the agency too had its concerns about China’s bad loan data, it could not prove that the numbers were false. “We have our concerns, but we have no evidence,” Kuo said.
For state-owned enterprises, the economic growth slowdown would have a different impact on different sectors, said Kai Hu, the vice-president for corporate finance at Moody’s.
Strategic sectors such as oil and natural gas production and the power grid will hang onto their monopolies, but consolidation measures recently announced by the government will be a blow to the dominance of state-owned enterprises in other sectors.
Overcapacity remained a key obstacle, particularly in cyclical industries, Moody's said, noting that capacity utilisation in China fell to 60 percent in 2011 from 90 percent in 2000. – Reuters