Moody's: China's policy easing signals change in stance amid slowing growth

Moody's Investors Service says that the fiscal and monetary easing measures announced by China's (A1 stable) authorities on 23 July signal a significant change in policy stance as its economy faces both domestic and external pressures.

While Moody's expects the immediate credit implications will be limited -- with only slightly higher levels of government debt -- the new measures suggest that the trade-offs between deleveraging and growth are becoming more stark.

Moody's conclusions are included in its just-released report "Government of China: Easing poses limited fiscal risk, but suggests policy trade-offs are starting to bite".

The new measures include fiscal and financial policies announced by China's State Council to support domestic demand and develop the real economy, and an injection of liquidity by the People's Bank of China.

Along with a more gradual shift in monetary stance over the last two months, Moody's says these measures represent a significant change towards more accommodative policy.

The measures come as a financing clampdown domestically and trade restrictive measures externally are weighing on activity growth in China.

The economy grew a still robust 6.7% year-on-year in April-June 2018, compared with 6.9% in 2017 as a whole. However, the pace of expansion is likely to slow in the second half of this year as previous government efforts to control debt risks curb investment spending and continue to restrain access to credit for weaker borrowers in particular, including some small and medium-sized enterprises. In addition, Moody's expects that trade barriers will weigh on exports and investments.

In themselves, Moody's does not expect the latest measures will add significantly to China's direct fiscal outlay. The government has reiterated its commitment to stabilizing leverage.

But the change in stance in the face of a growth slowdown of uncertain intensity indicates that the hurdles to the Chinese authorities in achieving their deleveraging goals are rising, says Moody's.

Assuming additional fiscal easing, in particular in 2019, to compensate for slower export growth due to higher US tariffs, Moody's projects government debt to rise to 37.6% and 38.3% of GDP in 2018 and 2019 respectively, from 36.2% in 2017.

Moody's maintains its economic growth forecasts at 6.6% in 2018 and 6.4% in 2019, as greater fiscal and monetary policy support will offset slower gains in private sector domestic and external demand than Moody's had previously expected.