By Dai Qi
Moody's released a report on China's macroeconomy Tuesday, showing the pace of China's economic structural change is picking up, a credit positive on China's economy.
The company holds that the significant credit challenges for China lie in its substantial misallocation of resources at the sectoral level, which result in excessive investment and overcapacity in sectors like steel, coal, aluminum and glass, as well as the increasing debt, particularly that of state-owned enterprises (SOEs).
The report says that if Chinese government's measures lead to reallocation of labour and capital resources that shift credit towards sectors with higher productivity growth, it will support the Chinese government's credit quality by increasing its debt-carrying ability.
Moody's thinks that addressing misallocation of economic and financial resources in China is at centre of current policy.
At the macroeconomic level, the returns on investment have just stopped declining, and stand at much lower levels than a few years ago. In terms of the allocation of financial resources, there is evidence of private sector companies continuing to deleverage while the ratio of SOE liabilities to GDP is still rising, although at a slower pace than in recent years.
The report notice that the authorities have identified excess leverage as a source of risk to economic, financial and social stability, and taken a number of measures to tighten access to credit. Overall credit growth has slowed, and is now rising at about the same pace as nominal GDP.
In the corporate sector, overall debt has levelled off as a proportion of GDP, breaking the upward trend of the last nine years. Deleveraging, as measured by debt or liabilities to GDP, seems to be occurring faster in the private sector than among SOEs.
Total SOE liabilities continued to rise in 2017, to 121% of GDP, mainly driven by the increasing leverage of local SOEs.
Meanwhile, the report finds that pace of shifts between sectors has risen, with signs of moves into higher value-added areas.
The structural change index for China's economy as a whole has been rising, signaling that economic resources are shifting between sectors.
Evidence on the mix of products in manufacturing indicates that activity increasingly centres on higher value-added sectors with greater growth potential, such as the manufacture of automobiles and electronic equipment.
However, the report thinks that there is no evidence that this is leading to higher productivity growth yet, consistent with significant lags between structural change and its impact on productivity.
Besides, Moody's notes that ongoing reforms should support further structural change in China's economy.
The report shows that China is investing significant amounts in innovation and has a policy objective to shift its economy towards higher productivity sectors, including through the Made in China 2025 programme.
Faster productivity growth would help to make debt levels more sustainable as the share of borrowing raised in higher value-added and more productive sectors increased. Whether such a credit positive change materialises will only become clearer over a period of several years.
