Moody's: China's consolidation of power could advance economic rebalancing, though challenges remain

Moody's Investors Service says that the further consolidation of power under President Xi Jinping — as outlined at the conclusion of the 19th National Congress of the Chinese Communist Party earlier this week — could advance the process of economic reform and rebalancing, because one obstacle to reform has been the misalignment of incentives between the central leadership and other officials.

"However, it remains unclear as to whether this increased centralization of authority will result in an acceleration of the pace of reform, or a continuation of the careful balancing of policy objectives in recent years, such as maintaining relatively strong growth and the strong role of state-owned enterprises," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.

Moody's conclusions are contained in its just-released report titled "Cross Sector -- China Credit: Party Congress consolidates central power, focuses on reform, but highlights challenges," which focuses on the week-long congress which concluded on 24 October.

Xi's speech at the start of the congress indicated that the party's policy goals for the next five years are generally in line with those announced during other high-level government meetings over the past two to three years, including the continuation of the government's anti-corruption campaign.

The ongoing campaign includes the commitment to strengthen party discipline and deepen reform of the state supervision system through legislation. A central leading group for comprehensive law-based governance will be established, while anti-corruption work will be institutionalized by the creation of the State Supervision Commission, which will coordinate work with the Commission for Discipline Inspection of the Central Committee, as led by the Communist Party.

"China (A1 stable) will likely reach its target of doubling per capita income by 2020 from the level in 2010," says Lillian Li, a Moody's Vice President and Senior Analyst and the report's lead author. "The government therefore has more policy space to achieve its other goals, such as the sustainability of growth and the reduction of economic inequalities across Chinese society."

In particular, Moody's expects that the added focus on the quality of growth will result in a greater emphasis on promoting productivity and reducing financial vulnerability. These developments would be credit positive for the sovereign and for many other rated Chinese entities, including most banks and corporates.

A stronger policy focus on financial sector regulation should continue to restrain the growth of shadow banking activities, help mitigate asset risks for the banks, and address some key imbalances in the financial system. The regulatory authorities also committed to maintaining financial stability through greater coordination of monetary policy, including measures for liquidity management, with the macro prudential assessment framework. These factors will be credit positive for the overall banking sector.

Other policy announcements suggest that reforms will continue to proceed cautiously and without challenging the dominant role of state-owned enterprises (SOEs) in strategic industrial sectors.

Moody's explains that despite the government's earlier commitment to allow the market to play a "decisive role" in resource allocation — when the reform program was announced at the third plenum of the 18th party congress in November 2013 — the latest policy announcements support Moody's expectation that SOEs will retain a significant role in the economy.

Moody's also points out that a further opening up of domestic markets — which the congress indicated will likely occur — could also interfere with the objective of having strong SOEs that play a leading role in their respective key sectors.