China's (A1 stable) economic rebound has strengthened and become more broad-based since the beginning of 2021, said Moody's recently.
Although growth momentum is likely to decelerate somewhat compared to the first half of the year, it will remain supported by domestic policies and robust external demand as the global recovery gathers pace, the credit rating agency noted.
"With the growth outlook seeming more secure, the government is shifting focus towards its other policy objectives that include rebalancing of the economy toward domestic consumption, maintaining employment growth and stabilizing economy-wide leverage," sayid Lillian Li, a Moody's Vice President and Senior Credit Officer.
The government is also shifting its attention to containing systemic risks in the financial sector, said Moody’s, adding that liquidity conditions are becoming more balanced, which will dampen overall bank loan growth.
Shadow banking assets will likely retreat further in 2021 as regulatory scrutiny tightens, Moody’s predicted.
Meanwhile, the economic recovery and softening stimulus-led investment growth would stabilise the economy-wide leverage ratio and growth in government leverage, as well as moderate the deterioration in capital productivity, the firm said.
Output losses due to the pandemic led to a jump in economy-wide leverage in 2020, and a plunge in capital productivity, the firm added.
Sectoral corporate performance has improved at a varying pace, although access to credit remains challenging for some, Moody’s observed.
Manufacturers of communication and electronic equipment led the recovery, followed by manufacturers of electrical machinery, automobiles, chemicals and medicines, the firm pointed out.
Although profitability has risen substantially for privately owned enterprises (POEs) and state-owned enterprises (SOEs), long-standing issues of restricted access to credit, limited economies of scale and exposure to more vulnerable sectors continue to plague POEs, the firm added.
The main risks to China's growth outlook over the next 12 months are faster-than-expected domestic policy normalisation or potential further waves of the pandemic, according to Moody’s.
Other challenges include maintaining exchange rate stability amid more volatile capital flows spurred by a faster opening of China's financial market in spite of uncertain conditions in global financial markets, the firm estimated.
A relaxation of the capital controls regime would be another challenge given it remains an important buttress against financial stability risks, Moody’s said.
In the medium term, a deteriorating geopolitical environment could present China with new growth challenges, the firm added.