The market’s concern about China’s short-term macroeconomic prospects is likely excessive, says a new report from Fitch Ratings Inc. published on Tuesday.
The New York-based credit-rating agency aims to calm fears about the immediate state of China’s economy in the report. The report concedes that a protracted slowdown in China “could have significant regional and global credit implications.” However, it also points out that recent policy action by the People’s Bank of China (PBOC) — cutting interest rates and reducing banks’ reserve requirement ratios — highlights the fact that China’s authorities have the ability to support the economy through monetary policy.
“The authorities still retain significant room to loosen policy further, with the one-year benchmark lending rate at 4.6% and RRR for large banks at 18%,” the Fith report says. Moreover, the devaluation of the yuan against the U.S. dollar has been a modest 4.7%, given that China’s currency had appreciated by almost 20% since 2012, the report notes
The government in China also has substantial fiscal room to boost growth, the report says, adding that “demand and output indicators do not point to an exceptionally rapid, disorderly or broad-based deceleration.”
Over the medium term, however, Fitch continues to see the potential for a prolonged period of lower growth, with real gross domestic product expansion settling into a “new normal” — likely to be well below 7%, the report notes.
“The enormous accumulation of debt following the 2008 global financial crisis and overinvestment in the residential real estate market, still need to be addressed, and will exert a drag on the economy over several years,” the Fitch report says.
For the global economy, “spillover effects will remain prominent credit risks as market expectations adjust to a more prolonged China slowdown,” the report says.
In particular, the report notes that “China’s property and investment boom were key factors driving global commodities demand — helping take China’s demand for metals production to 47% of the global total — almost as much as the rest of the world put together.”
As a result, “there are fundamental justifications for the recent downward price action in commodities and major commodity exporters’ currencies,” the report concludes.