China’s Deleveraging To Hinder Growth: Moody’s

China’s efforts to deleverage and de-risk its economy are now ‘slowing’ as the measures appear to constrain domestic activity, amid downside risks related to escalating trade tensions. This, according to global ratings agency Moody’s Investor Service, is and will be enough to hinder the growth of one of the world’s largest emerging markets.

The agency this month stated in a published report that growth pressures, among other issues, have prompted Chinese authorities to ‘adjust’ the course of its de-leveraging of its economy, which runs side by side with the US economy as the largest in the world.

One example, according to the agency, is the People’s Bank of China’s (PBOC) recent cut the required reserve ratio in July and October to maintain ample liquidity, ease credit conditions, and support growth. The Chinese government has also announced a new slate of measures, pointing to more accommodative fiscal policy.

“While the long-term objectives of deleveraging and de-risking remain in place, in the current circumstances China’s authorities are likely to rely to a greater extent on spending by the broader public sector to support growth,” says George Xu, a Moody’s Analyst, one of the report’s co-authors.

For regional and local governments in China, the agency notes this development will imply a rise in leverage, albeit at a moderate pace.

In addition, as the central government seeks greater transparency of direct and contingent liabilities, Moody’s expects that spending will increasingly be incurred by regional and local governments rather than by local government financing vehicles (LGFVs).

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