China is likely to experience persistent capital outflows throughout 2017, which could lead to “a more activist fiscal policy” to maintain current growth targets, according to a new research report from Moody’s Investors Services Inc. released this week.
But while some smaller and mid-size banks in China may experience an impact on their liquidity, leading to higher borrowing costs, larger banks and non-financial companies are likely to be resilient to capital controls and a modest decline in China’s currency, the report says.
China said earlier this month that it would strive to maintain a stable currency in the global context. In the face of the pull of a higher U.S. dollar and capital outflows, the government may use capital controls and its still deep government reserves to support its currency, the report says. If China then adopts more activist fiscal policies to support growth, such as government spending, its debt may rise.
With China’s general government debt at 36.7% of gross domestic product in 2016, Moody’s expects it to rise to 39% by 2018. Although Moody’s expects that most Chinese companies will remain resilient in the face of these expected monetary and fiscal measures, it cautions against the long-term use of these interventions.
“If the authorities were to continue such measures over a prolonged period, the effects could delay reforms that would foster a more market-based pricing of risks, a credit negative for the sovereign,” Moody’s concludes