Source: asiainsurancereview.com

The Chinese government’s modest growth target of above 6% for 2021 and greater focus on longer-term issues are positive for the sovereign’s credit quality, according to a new report from Moody’s Investors Service.

“The conservative GDP growth target leaves China with space to work on other long-term policy objectives, including boosting domestic consumption, addressing environment sustainability and energy saving, strengthening the social security network and promoting key strategic industries,” said Ms Lillian Li, a Moody’s vice president and senior credit officer. “This shift will support the sovereign’s credit quality, while also reducing the pressure on regional and local governments (RLGs) to stimulate growth.”

Meanwhile, the scaling back of stimulus will add to less resilient RLGs’ credit pressures, while the likely gradual rise in interest rates will have a mixed credit impact on banks. Some banks will see improved profitability as net interest margins recover, while others – especially those reliant on wholesale funding – will see their liquidity come under pressure as high-cost structured deposits resume.

On a macro level, the gradual normalisation of fiscal policy indicates a continued rise in general government debt, as well as higher spending on long-term issues like innovation and infrastructure which would be credit positive if it raises productivity.

Meanwhile, the normalisation of monetary policy suggests that the authorities’ focus has shifted to preventing financial risks such as escalating leverage and rising local government debt. And although the increase in general government debt is credit negative – with Moody’s forecasting China’s general government debt to peak around 48%-49% of GDP by 2024, up from around 39% of GDP in 2019 – this is still smaller than the A-rated median of 50%-55% of GDP that Moody’s forecasts over the next few years.