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Moody's Investors Service says that an increase in China's (A1 stable) credit efficiency of growth is key to reducing leverage while meeting official growth targets and preventing a sharp increase in defaults.
Moody's points out that China's National Financial Work Conference — which sets the country's financial policy direction every five years, and which concluded on 15 July 2017 — has demonstrated a refreshed commitment to facilitate reforms to curb leverage among state-owned enterprises, companies as a whole, and the broader economy, to avoid the risk of a financial crisis.
"The Chinese authorities will balance the competing aims of short-term, credit-fueled growth — which they target at around 6.5% in 2017 — and long-term policy measures to increase the resilience of the financial system and to reduce and eventually reverse the growth of leverage in the economy," says Michael Taylor, a Moody's Managing Director and Chief Credit Officer for Asia Pacific.
Moody's says that managing these policy trade-offs will mean sustainably reversing a trend in which progressively larger amounts of credit have been needed to generate any given amount of GDP growth that has been evident since the start of this decade.
"Our baseline assumption is that credit intensity — which is the amount of credit needed for an additional unit of output — will continue to rise, while credit growth will slow; scenarios which are consistent with an average GDP growth of 6.1% until 2020. But variations in credit intensity, which the authorities do not control directly, have a material impact on growth outcomes," says Martin Petch, a Moody's Vice President and Senior Credit Officer.
Moody's analysis is contained in its just-released report titled "Cross-Sector - China - Reduced Credit Intensity of Growth Key to Achieving Policy Objectives,".
Moody's explains that the authorities do not directly control the credit intensity of growth. Instead, they influence such growth indirectly through various policies, such as reform of the state owned enterprise sector, with effects that are very difficult to ascertain in advance. Consequently, actual developments in credit intensity are highly uncertain.
