China’s recent measures to support the economy mark a shift in the policy stance towards easing and away from the previous singular focus on addressing financial risks, says Fitch Ratings. Easing is likely to stop short of the type of credit stimulus that could add significantly to economic imbalances, but this remains a risk that could have negative implications for the sovereign rating.
A series of loosening measures have been announced over recent months in response to signs that previous tightening has had an overly blunt effect on the economy, exacerbated by risks from trade tensions with the US. Easing measures have included reserve-requirement ratio cuts, liquidity injections, dilution of some recent macro-prudential tightening measures, and circulars that call for more accommodative fiscal policy and other forms of support to the real economy.
The authorities appear eager to avoid another large-scale stimulus, reflecting the sheer scale of the economy’s indebtedness, the prominence of the deleveraging drive and the designation of financial de-risking as one of three “critical policy battles”. Moreover, our baseline scenario is that an aggressive policy response is unlikely to be necessary to meet the authorities’ stated growth objectives, with growth forecast to slow only gradually – to 6.6% in 2018 and 6.3% in 2019 from 6.9% in 2017.
However, the continuing importance of medium-term growth targets suggests that a significant loosening of policy cannot be ruled out in the event of a macroeconomic shock or a slowdown that is sharper than we expect. Rising trade tensions raise the likelihood of such a policy response. We do not see the US tariffs already imposed on USD50 billion of Chinese goods as large enough to revise our China growth forecasts, but the imposition of a further round of US tariffs on USD200 billion in goods, as threatened by the US administration, could have a material effect.
The deleveraging campaign had succeeded in essentially stabilising macro-leverage ratios, with a particularly strong impact on riskier, less transparent lending within the shadow-banking sector. Downward pressure on the rating could emerge over time if we were to assess that a reversal of policy settings could result in a further build-up of the economy’s vulnerabilities. Policy easing is only at a nascent stage, and we last affirmed China’s ‘A+’/Stable sovereign rating in March 2018. The policy stance is among the key sensitivities that we will continue to monitor.
