Moody’s de­mands faster eco­nomic re­forms in China

The Pak Banker - - Front Page -

BEI­JING

China must ac­cel­er­ate the pace of fi­nan­cial re­form in coming months to sus­tain eco­nomic growth, rat­ings agency Moody’s In­vestor Ser­vices said, fore­cast­ing the world’s sec­ond-largest econ­omy will grow 7.5 per cent each year from 2012 to 2014.

Ex­pec­ta­tions of steady ex­pan­sion means China is un­likely to suf­fer any eco­nomic “hard land­ing,” or abrupt slow­down, Moody’s said, but warned that the days of easy growth for the world’s fastest-grow­ing ma­jor econ­omy are over.

Dif­fi­cult fi­nan­cial re­forms that make space for a more mar­ket-driven sys­tem must be made to cut in­ef­fi­cien­cies, it said. At the same time, China no longer en­joys the wide berth it had be­fore to bol­ster growth in un­fore­seen down­turns.

“With­out more mar­ket­based price sig­nals driv­ing the ef­fi­cient al­lo­ca­tion of cap­i­tal and im­prov­ing the com­pet­i­tive de­liv­ery of ser­vices, China’s trend growth rate will likely slow more rapidly than oth­er­wise,” Moody’s said in a report.

Cru­cial ar­eas of re­form in­clude in­creas­ing mar­ket­based com­pe­ti­tion, im­prov­ing reg­u­la­tion to al­low greater cer­tainty and trans­parency on fu­ture rules and de­ci­sions, and mak­ing China’s hulk­ing state firms more ef­fi­cient, Moody’s said.

While th­ese changes should un­cover new en­gines of growth, the road will not be smooth sail­ing. The 4 tril­lion yuan stim­u­lus from Bei­jing four years ago that led to ex­plo­sive growth in China’s lo­cal government debt and rapid ex­pan­sion of its banks means the coun­try can no longer in­dulge in a credit binge if the econ­omy swoons, Moody’s said.

Banks were es­pe­cially im­per­illed by China’s pre­vi­ous credit ex­trav­a­gance, it said, not­ing China’s to­tal bank as­sets dou­bled in the past four years, leav­ing them ex­posed to in­dus­tries now mired in ex­cess pro­duc­tion ca­pac­ity.

To­tal as­sets in China’s bank­ing sys­tem are now worth 240 per cent of the coun­try’s gross domestic prod­uct at 113.3 tril­lion yuan ($18.2 tril­lion), sub­stan­tially higher than any other ma­jor emerg­ing econ­omy, Moody’s said.

As a re­sult, the agency judged Chi­nese bank as­set qual­ity to be “neg­a­tive” for the next 12-18 months, even though it as­sessed the bank­ing sys­tem to have a “sta­ble” out­look in the pe­riod.

China’s sta­bil­is­ing eco­nomic growth has ar­rested the uptick in its banks’ bad loan ra­tio, Moody’s said, and there are no indi­ca­tions that as­set qual­ity will worsen ma­te­ri­ally in coming months.

China’s four big­gest sta­te­owned banks which con­trol about half of the coun­try’s to­tal bank as­sets all have non-per­form­ing loan ra­tios of be­low 1.5 per cent, draw­ing crit­i­cisms from an­a­lysts who say the num­bers are too low and not to be trusted.

Chris­tine Kuo, vice-pres­i­dent of Moody’s Fi­nan­cial In­sti­tu­tions Group, said while the agency too has its con­cerns about China’s bad loan data, it can­not prove that the num­bers are false.

“We have our con­cerns, but we have no ev­i­dence,” Kuo said. For state-owned en­ter­prises, the eco­nomic slow­down will im­pact dif­fer­ent sec­tors dif­fer­ently, said Kai Hu, vice pres­i­dent for cor­po­rate fi­nance at Moody’s.

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