China Doomed To Fail As It Chases ‘Impossible Trinity’ Of Growth, Reform And Stability: Moody’s

March 9, 2016 

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Chinese Economy

Beijing is bound to fall short of at least one of its three conflicting goals, ratings agency says

ZHOU XIN

Decorators wait to be employed at a home furnishing market in Beijing. Ratings agency Moody’s has cut its outlook for China from ‘stable’ to ‘negative’. Photo: EPA

China is bound to fail in at least one of its three conflicting aims to achieve growth, institute reform and maintain stability, says Moody’s as it engages in a war of words with Beijing over the country’s economic prospects.

China’s three policy objectives formed an “impossible trinity”, the ratings agency said in a research report published on Tuesday.

Beijing could at best achieve only two of those objectives at one time, it said.

The research note – authored by six analysts and led by Michael Taylor, Moody’s managing director and chief credit officer for the Asia-Pacific – was released just hours after China reported a 20 per cent drop in February exports – its biggest fall since 2009 when the country was hit hard by the global financial crisis.

China on Tuesday reported a 20 per cent drop in February exports – its biggest fall since the global financial crisis in 2009. Photo: EPAIn the face of its “trilemma”, Moody’s said, China was now pursuing growth and stability over reform, as seen from its government work report delivered to the National People’s Congress.

“While the combination of growth and stability might seem to minimise risks in the short run, it is likely to leave unaddressed, in the long run, the deep imbalances evident in China’s economy, thereby increasing the long-term adjustment costs,” the report said.

Moody’s angered Beijing last week when it changed the country’s credit rating outlook from stable to negative even as the Chinese government tries desperately to convince the world that its economy remains safe and stable.

The actual downgrade would not take place until after “a range of things” had happened in China, Marie Diron, senior vice-president of Sovereign Risk Group with Moody’s, told the South China Morning Post in a telephone interview.

These included clear evidence that reforms aimed at slowing leveraging were being put on hold and that there was a persistent fall in foreign exchange reserves.

“It’s really going to the core of the ‘trilemma’: how the authorities will manage growth, reform and stability,” said Diron, who was one of the authors of the Moody’s report released on Tuesday.

The ratings agency said on Tuesday that the implementation of an accommodative monetary policy in China to aid growth “would lead to further downward pressure” on the yuan and “would likely delay much-needed deleveraging”.

The ruling Communist Party’s mouthpieces, includingPeople’s Daily and Xinhua news agency, separately published articles lambasting Moody’s judgment as biased.

Meanwhile, senior Chinese officials including top economic planner Xu Shaoshi, defended China’s economic fundamentals, ruling out the possibility of a “hard landing”.

Xu Shaoshi, director of China’s National Development and Reform Commission, has said China’s economy would not meet a hard landing. Photo: EPABut Moody’s is not alone in its views on China’s economy.

The priority Beijing had put on its rate of growth – at least 6.5 per cent annually for the five years until 2020 – was “likely to detract from the more painful reforms and reduce the appetite for reining in credit growth and reducing excess capacity,” Louis Kuijs, head of Asia economics at Oxford Economics in Hong Kong, wrote in a report earlier.

Still, others say it may not be totally impossible for growth, reform and stability to go hand in hand.

China’s target growth range at 6.5 to 7 per cent for 2016“takes into account the backdrop of economic rebalancing, as well as the need to stabilise market expectations,” Zhu Haibin, chief China economist with JPMorgan, said.

Stabilising growth would be Beijing’s top policy priority “among the key macro targets of growth stabilisations, economic rebalancing and containing systemic risks”, Zhu said.