China's authorities have recently renewed their commitment to vigilance towards financial risks and reforms to curb leverage, but trade-offs will be apparent and the impact on Chinese issuers will be varied, according to Moody's Investors Service.
China's growth model has relied on credit-funded investment, especially in infrastructure. While the rebalancing of the economy towards consumption has started, credit-funded investment is likely to remain an important driver of economic growth for the foreseeable future.
Policy trade-offs will arise between restricting and enhancing the transparency of the supply of credit, thus limiting risks to financial stability, while at the same time maintaining a relatively high level of GDP growth.
Moody's conclusions are contained in the new edition of its "Inside China" newsletter, which collates some of the latest research on key credit themes relating to China.
Another report looks at how the economic and fiscal performance of regional and local governments (RLGs) in China was positive in the first half of 2017.
RLG bond issuance was low due to market conditions during the period, but we expect it to accelerate in the second half of this year.
The newsletter also looks at how a favorable policy environment will drive growth in China's renewable energy sector, underpinned by its increasing strategic importance, given the need to combat air pollution and to reduce reliance on coal-fired power.
Grid curtailment and over-reliance on government subsidies are the near-term industry challenges, while a downtrend in tariffs will not have a material financial impact on renewable energy companies.
Another article looks at Chinese banks' first half 2017 performance, based on the announced results of 16 listed banks rated by Moody's, which demonstrates that regulatory measures implemented since January have been successful in containing financial risks and unwinding some shadow banking and interbank activities.
This success is likely to continue under the current regulatory environment; a credit positive for banks as it relieves strains on capital and funding positions, although at the expense of profitability. Lower profitability is more likely for banks that have relied on market funds to support the previous phase of asset expansion.