Singapore, December 10, 2008 — 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.
