Financial crisis in China can be prevented, Moody’s says
China has the tools to prevent a financial crisis from materializing in the near future, though an erosion in credit quality remains likely, Moody’s Investors Service said on Tuesday.
The country’s domestically funded and State- backed financial system, combined with a wide range of policy tools, including “moral suasion,” act as powerful mitigators to the risk of a financial crisis, Moody’s said in an email to the Global Times on Tuesday.
Moody’s believes this range of tools, and the authorities’ willing- ness to employ them, significantly decrease the risk of a substantial contraction in the supply of credit, or widespread disruption to financial intermediation, normally associated with systemic financial crises, it noted in the e- mail.
While financial liberalization, particularly of the capital account, would weaken the authorities’ ability to manage systemic risk, the authorities are expected to remain cautious in their approach and will retain the existing capital controls over a prolonged period, Moody’s noted.
In China, persistent and sizeable capital outflows would challenge banking system liquidity, reduce the ability of accommodative monetary policy to prevent widespread defaults and increase the likelihood of a currency devaluation, Moody’s warned.
Still, it believes that the central government is aware of these risks.