Bangkok--11 Dec--Moody's Investors Service
Moody's Investors Service says in a new report that the Chinese government's massive multi-year fiscal stimulus program will only have limited effect as China faces the prospect of a substantial slowdown in economic growth.
Despite its four-trillion-yuan size (equal to 15% of GDP), the fiscal stimulus program will not likely be able to offset the contraction in export growth from the unfolding global recession, nor will it be able to tackle the negative knock-on effects on the manufacturing sector, according to Moody's Global Sovereign China Report.
"Moody's baseline scenario, consistent with a tepid recovery from the global recession in late next year, is for real GDP growth to range between 7 and 8% in 2009, but then rebound to 8-9% in 2010," says Thomas Byrne, Moody's Senior Vice President/Sovereign Regional Credit Officer for Asia and the Middle East, and author of the report.
"However, a more severe and protracted global recession could lower China's real GDP growth to the 5-7% range in 2009 and 2010," says Byrne.
"Whichever scenario plays out, China's growth will decelerate sharply from the average annual rate of almost 11% in the past five years," says Byrne.
"We also expect the budget balance to shift to a deficit of between 3 and 5% in the next two years, but that the government's ample financial strength would not be permanently impaired and the rating outlook would remain stable," adds Byrne.
The report also states that a temporary reduction in the economic growth rate below the often stated 8% threshold would probably not undermine the country's socio-political stability, despite rising factory closures which are displacing migrant workers. The Chinese Communist Party has demonstrated the ability to sustain popular support.
China's A1 foreign and local currency bond ratings are supported by the country's relatively high economic strength and very strong government finances, says the report. The scale of its economy, the third largest globally, reflects a high degree of diversity and provides stability to external shocks, while a very high level of national savings offsets a much lower GDP per capita than its rating peers, providing a large pool of domestic funds for investment.
China's successful reforms also impart economic strength and resilience.
Its almost $2 trillion holdings of official foreign exchange reserves, coupled with a cautious strategy for financial market liberalization, limit contagion from the global financial crisis.
The rating is also supported by a firming of China's strategic regional and international relationships along with its economic might.
Geopolitical risks, however, lurk over the ambiguous status of Taiwan.
Yet a new dynamic in cross-Strait relations holds the potential for a more constructive engagement between the two governments.
Moody's global sovereign report entitled "China" can be found at www.moodys.com.
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Singapore
Thomas J. Byrne
Senior Vice President - Regional Credit Officer Sovereign Risk Group Moody's Singapore Pte Ltd.
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New York
Steven A. Hess
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service
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