China’s economy has entered the year on a “relatively stronger footing” than last year, as recent data point to a rebound in activity and suggest that real gross domestic product growth “will likely measure comfortably in the 7.5%-8.5% range” in 2013, Moody’s said in a paper about the country’s outlook.
“The recovery is supported by policy easing and credit extension, particularly by the non-banking sectors,” Moody’s said.
The People’s Bank of China (PBOC) cut rates twice and reserve requirement ratios for banks 3 times last year, complementing these policy actions with “a big step-up in open-market operations,” according to the rating agency.
“Recent developments suggest that fiscal policy has also become more expansionary,” it said, citing a slowdown in the growth of revenues to the state budget to 12.8% in 2012 from 25% in 2011, overtaken by 15.1% growth in expenditure.
In the previous two years, revenue grew faster than expenditure.
Moody’s estimates that China’s budget deficit was 1.5% of GDP last year, higher than 2011’s 1.1%.
China’s rebound is also supported by the recent stabilization in global economic conditions, it said.
Export growth increased to 9.4% in the fourth quarter from the third quarter’s 4.4% growth; but for 2012 as a whole, exports increased by just 7.9%, less than half 2011’s 20% growth.
“Our view is that China’s potential, real GDP growth may range between 7% and 8% annually over the next 5 years through 2017, with the advancement of financial market reforms and sound regulations,” Moody’s said.
SHADOW BANKING ON THE RISE
Growth in domestic bank loans picked up to 15.6% last year, compared with 2011’s 14.3% increase. Domestic credit to GDP is around 150%, lower than the eurozone’s 174.5%, Taiwan’s 171% and Japan’s 240%.
Moody’s noted that “another very major source of financing – shadow lending – has emerged outside the traditional banking sector, channeling funds into the real estate sector and local government financing vehicles.” It said its influence was “striking.” What the PBOC describes as total social financing (TSF) – a measure for overall lending that includes, besides bank lending, things like loans from trust companies (which are lightly regulated), corporate bond issuance, equity issued by non-financial companies and other sources of money – increased by 22.8% last year, boosted by a 38.8% surge in non-bank lending.
There are no clear figures for the size of China’s shadow banking system, but Moody’s quoted an estimate made by the Hong Kong Monetary Authority that put it at 26% of GDP as of the end of last year.
Investors’ desire for more risk and higher yields, coupled with “financial repression” in the form of limits on interest rates in the banking system, are behind the rise in shadow financial activities in China, the rating agency said.
“The authorities see these activities as part of the process of financial sector liberalization. Nevertheless, this strong increase in non-bank financing could pose problems down the road, particularly if a significant share of it winds up on banks’ balance sheets during an economic downturn,” it said.
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