Moody's Investors Service expects China's economic growth to remain relatively robust, although at a slower rate of between 7.5% and 7.0% in 2014-15 as the authorities begin to implement the Third Plenum's structural adjustment policies, while the rising indebtedness of the country's local governments and corporates is expected to weigh on economic activity ahead.
At the same time, Moody's considers that although investment will be less crucial in achieving a sustainable path of growth in the future, it will remain an important driver behind China's rise in the ranks of middle-income economies.
Moody's conclusions were contained in a just-released report titled "China's Growth to Remain Robust, Downside Risks in Check" and which coincides with the end of the latest annual session of the National People's Congress (NPC) on 13 March.
More generally, relatively rapid momentum in economic growth, macro-prudential regulation and steps taken to advance reform through 2014 -- such as those detailed at both the Third Plenum of the Communist Party in November 2013 and the NPC -- will continue to buttress the creditworthiness of China's central and local governments, banks and corporates alike.
Over the longer term, and Moody's views this outcome as the most likely scenario, the effectiveness of this sweeping reform agenda -- including a rebalancing of public- and private-sector roles -- will be the key determinant of whether the economy will achieve a sustainable growth equilibrium, but at a pace below that of the last three decades.
The report notes that Premier Li Keqiang's report at the NPC considered that the foundations for steady growth are not yet firm, but that economic and social reforms, including a crackdown on corruption and pollution, will help China maintain real GDP growth of around 7.5% per annum.
Furthermore, Finance Minister Lou Jiwei indicated that the authorities are willing to sacrifice faster growth for economic sustainability.
In this context, one of the more concrete and critical policy objectives highlighted by China's authorities is keeping registered unemployment below 4.6% and, both Premier Li and Finance Minister Lou emphasised the importance of employment. Accordingly, Moody's believes that the authorities' focus on jobs has parallels with their vigorous stimulus in response to the global financial crisis.
On the issue of the build-up of debt at the local government level, the Moody's report says the possibility that the central government may need to provide additional fiscal resources to bolster the finances and debt-repayment capacities of the relevant entities represents a contingent liability constraining sovereign creditworthiness.
Additionally, the maturity structure of this debt is relatively near term, suggesting that the currently moderate level of general government gross financing needs, less than 8% of GDP in 2013, will rise further.
The report also says that over the medium term, China's sovereign credit profile would robust provided that the reform agenda outlined by the Third Plenum, and further fleshed out during the NPC, gains traction. Moody's central scenario remains one of stable GDP growth, low inflation, modest fiscal deficits and a strong external position.