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China Economy

Morgan Stanley stays bullish on China after Moody’s downgrade

China’s solid ‘counter cyclical’ measures are unlikely to derail growth, the big Wall Street investment bank says in its China Summit research report

PUBLISHED : Friday, 02 June, 2017, 10:02am
UPDATED : Friday, 02 June, 2017, 11:07pm

A big Wall Street investment bank is voicing optimism over China’s economic and financial prospects, days after Moody’s Investor Service downgraded the country’s credit ratings.

China will continue to clean up its interbank activities and curb credit expansion to bring financial risks under control, applying good “counter cyclical” measures that are unlikely to derail growth, Morgan Stanley said in a research report released during its China Summit in Beijing.

“Growth has peaked and will moderate in coming quarters due to higher base and reduced policy support,” the report said. “Nonetheless, the slowdown will be modest due to strong external demand and better private capital expenditure.”

Debate over the outlook for the world’s second-biggest economy is heating up again after Moody’s lowered China’s sovereign ratings for the first time since 1989, citing the country’s huge debt.

Conflicting indicators also raise the question of whether China can avoid a big economic downturn or financial crisis to leap through a middle income trap - or an economic situation where a developing country gets stuck at a certain income level.

Bullish Chinese policymakers cite strong growth and stable yuan

For the short term, China’s factory activities remain strong, according to China’s official manufacturing purchasing managers’ index for May, released Wednesday. However, a separate PMI released by Caixin on Thursday dipped to the “contraction” zone for the first time in 11 months.

Amid a 6.7 per cent GDP increase in 2016 and a 6.9 per cent rise in this year’s first quarter, the Chinese government is shifting its policy focus to risk prevention and deleveraging from growth. China’s enhanced banking regulations, in tandem with moderate monetary tightening, suggest it is doubtful that Beijing will overact to create financial turmoil.

Robin Xing, Morgan Stanley’s chief China economist, said financial tightening will continue, but is unlikely to bear any resemblance to the “credit crunch” of the summer of 2013, when the overnight interbank borrowing rate surged to a peak of 30 per cent.

“The policy coordination between regulators has been greatly improved compared with several years ago,” Xing told a media briefing. He cited the central bank’s timely injection of liquidity last month amid the banking regulator’s crackdown on off-balance activities.

Xing described current deleveraging moves as “a controllable tightening”.

Moody’s downgrading of China’s credit rating is without basis amid ‘new normal’ in the economy

China’s growth in aggregate financing, the broad measure of credit, slowed by 2 percentage points in the past year. Meanwhile, the People’s Bank of China (PBOC) raised interbank policy rates minimally, instead of hiking the benchmark lending or saving interest rate.

The investment bank estimated a further rise of 40-50 basis points in interbank rates for the rest of this year - in a response to any new rate hikes by the US Federal Reserve.

PBOC said earlier that it will use its medium-term lending facility to add liquidity in early June, a dovish statement from the central bank.

Chetan Ahya, Morgan Stanley’s chief Asia economist, said China can avoid financial shock for the immediate future and attain high-income status by 2027.

Moody’s cuts ratings of 26 Chinese state firms after sovereign downgrade

The country’s debt buildup was generated by excessive capacity investment, Ahya said. The capital came from its own excess savings, in contrast with some Southeast Asian countries which relied on foreign debt for investment, causing them to get stuck in the 1997 financial crisis.

China’s current account surplus, big foreign exchange reserves and low inflation give Beijing “better control on the cost of capital” than other Asian countries, therefore making China different, Ahya said.

“The Chinese central bank injected the liquidity by buying bonds and putting the yuan [generated from selling the dollar] back into the system,” he said.