Fitch Ratings Sees No Reversal in China's Economic Strategy

China's State Council's further monetary and fiscal easing, stops short of reverting to indiscriminate credit expansion as a stimulus tool, and remains in line with targeted easing measures announced earlier in the year, says Fitch Ratings.

The agency does not see the statement as signalling a risk that the Chinese authorities are abandoning the objective of returning the economy to a more sustainable growth path.

The measures announced were oriented towards short-term stimulus including a broad announcement to "support economic growth", with "more flexible fiscal and monetary policies", and to "ease financing difficulties". This indicates ongoing concern by government over the slowdown in growth thus far in 2014.

Fitch has long highlighted the risks posed to China by structural imbalances caused by a surge in credit-fuelled investment growth since 2009.

The government faces major challenges as it brings growth down to a sustainable level and unwinds excesses. Managing a rebalancing without triggering a "hard landing" will be key for the outlook on China's sovereign risk.

The real estate sector has been a major focus of investment - and consequently, now poses the most significant risk to the economic outlook.

Fitch continues to believe that the authorities' strategy is to allow for a gradual correction in the housing market by supporting consumer demand through targeted measures, for example to boost mortgage lending.

But the measures outlined in the latest announcement could suggest that policy-makers feel that the steps to boost demand are not having a sufficient impact.

It is important to note that the statement continued to emphasise using "targeted" stimulus measures, which is a meaningful distinction from a broad-based credit easing.

Other measures highlight continued support only for specific sectors such as agriculture and SMEs, further indicating that the announcement is more in line with reinforcing existing reform strategies as opposed to reverting to a credit-fuelled investment-growth model.

Recent statements by senior Chinese government officials indicating that they were prepared to see an undershoot of the official growth target if employment remained robust, also suggest that the reform and rebalancing initiative remains intact.

In keeping with this line, Chief Economist Ma Jun of the People's Bank of China stated on 11 October that the labour market remained stable, the government would avoid a "big stimulus", and that leverage to sectors such as state-owned enterprises and local government financing vehicles was already too high.

Forthcoming macroeconomic data, due to be released in the latter half of October, will add further detail on the ongoing rebalancing in China's economy.

An ongoing slowdown in domestic demand would be likely to add to pressures for further stimulus measures - and, in turn, policy-makers' response will be a key indicator for the medium-term economic direction, says Fitch Ratings.

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