• Wed
  • Sep 17, 2014
  • Updated: 6:15pm
BusinessEconomy

Moody's says China growth as low as 6.5 pc paves way for economic reform

Ratings agency says central government's apparent policy of favouring stability over growth will gradually work out imbalances

PUBLISHED : Wednesday, 18 June, 2014, 1:19am
UPDATED : Wednesday, 18 June, 2014, 1:43am

Beijing should be ready to accept growth as low as 6.5 per cent this year and the next to facilitate structural reforms needed to rebalance the economy, says Moody's Investors Service.

"It's a rare phenomenon where economies sustain rapid growth for even three decades, let alone for longer," Thomas Byrne, senior vice-president on sovereign risk at Moody's, told the South China Morning Post yesterday.

The ratings agency predicts China's real, or inflation-adjusted, gross domestic product growth will edge down into the 6.5 to 7.5 per cent range this year and next, compared with double-digit rates of the past decade.

The Moody's assessment comes amid the raging debate among China watchers over whether the economy will decelerate substantially in the years ahead because of challenges such as overcapacity, rising labour costs and mounting financial risks.

After growth cooled to an 18-month low of 7.4 per cent in the first quarter, President Xi Jinping urged people to adapt to a "new normal" of lower growth rates.

"So far the signs are suggesting authorities are favouring stability over growth and will gradually work out the imbalances in the economy," Byrne said.

"The risk is that [the] reforms are not carried out decisively and that the build-up in the leverage of the system is not contained."

Calls on Beijing to firmly push ahead with reforms have intensified, with critics saying the government should also do more to clip the wings of powerful state-owned enterprises.

Some fear that lack of progress in growing the private sector might derail the much-needed economic transformation that requires more innovation, robust consumption and job stability.

Cooling external demand and the continued slide in the domestic property market are clouding China's economic prospects, although Ministry of Commerce spokesman Shen Danyang yesterday said the country's trade is likely to stabilise and recover thanks to a pick-up in overseas demand and the government's policy support.

"Foreign trade is expected to show more significant rebound in the second half," he said, while cautioning that the recovery was not yet on a firm footing.

The mainland's exports grew 7 per cent in May from a year earlier but imports fell for the third month in a row, down 1.6 per cent year on year.

Property investment growth eased to 14.7 per cent year on year in the January-May period, down from the 16.4 per cent growth in the first four months but Byrne said he does not see a collapse. "Often with a collapse, households are highly leveraged or the banks are highly exposed directly to the property market. That's not the case in China."

Challenges in rebalancing were also reflected in retail sales, which only accelerated slightly in May after being hit heavily by Beijing's anti-corruption drive.

"As a new and tougher round of anti-corruption measures has already kicked in and will stay effective for another year, we anticipate further shrinkage in government and enterprise consumption," which accounts for about 40 per cent of total retail sales, said Nomura analyst Wendy Liu.

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