China’s fiscal stimulus and credit rating outlook

By Glenn Dyer | More Articles by Glenn Dyer

Both Moody’s and Fitch have put China on a negative outlook for its credit rating. S&P Global has taken a different stance, suggesting that the country’s fiscal stimulus is running out of steam and might need to be topped up.

All three agencies have China rated at their version of a single A+ standing, which is solid but well below the likes of Australia and Singapore, for instance. Moody’s and Fitch have a negative outlook, while S&P is stable.

S&P Global’s latest report came after the end of the March monthly and quarterly data drops from China, leaving many questions unanswered about just how strong growth and the wider economy are.

It was the second report on China from S&P Global since early March. Back then, it warned that China’s credit rating could be cut if its economic recovery remains weak or is driven largely by extensive stimulus. S&P analyst Kim Eng Tan said pessimism about China needs to lift so that the economy rebounds and fiscal pressures ease—an improvement currently factored into S&P’s rating.

Tan stressed that for now, the signals were “mixed” and cited a still “decent chance” that the economy rebounds “quite a bit” this year. If that bounce needs a lot more stimulus than planned, “the arguments for a negative rating action will strengthen” as China’s debt would increase faster, he added.

So, what are we to make of this second report, which says the country may need to find more stimulus?

S&P Global Ratings senior analyst Yunbang Xu said in a report last week that China’s fiscal stimulus is losing its effectiveness and is more of a strategy to buy time for industrial and consumption policies now emerging from the government.

“In our view, fiscal stimulus is a buy-time strategy that could have some longer-term benefits if projects are focused on reviving consumption or industrial upgrades that increase value-add,” Xu said.

High debt levels limit how much fiscal stimulus a local government can undertake, regardless of whether a city is considered a high or low-income region, the S&P report said.

“Given fiscal constraints and diminishing effectiveness, we expect local governments will focus on reducing red tape and taking other measures to improve business environments and support long-term growth and living standards,” S&P’s Xu said. “Investment is less effective amid [the] drastic property sector slowdown,” Xu added.

Fixed asset investment for the year so far picked up pace in March versus the first two months of the year, thanks to an acceleration of investment in manufacturing, according to official data released last week. Investment in infrastructure slowed its growth, while that in real estate dropped further into the black hole.

The measures are officially expected to create well over 5 trillion yuan ($US704.23 billion) in annual spending on equipment but are only now being revealed, such as a low Loan to Value for new car buyers and better deals for used car trade-ins, scrappage, and exports.

Steel exports are being encouraged once again and have already sparked a negative reaction from the US government, even though many exports are not going to the US but other countries.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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