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China's desire for headline growth may hide longer-term risks

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China's desire to hold up headline growth figures may increase longer-term risks for the world's second-largest economy, ratings agency Moody's Investor Services said on Thursday.

[HONG KONG] China's desire to hold up headline growth figures may increase longer-term risks for the world's second-largest economy, ratings agency Moody's Investor Services said on Thursday.

Even though the ratings agency has kept its growth forecast for China unchanged at 6.3 per cent for this year, it said headline growth continues to be supported by increasing amounts of debt which could lead to more problems down the road.

"Delivering target headline growth rates as the primary objective could come at a cost to the quality of growth due to further misallocation of resources, and limit the government's ability to address imbalances in the economy through implementation of reforms," authors Madhavi Bokil and Dima Cvetkova wrote.

China has set an economic growth target of 6.5 per cent to 7 per cent this year, after growth cooled to a 25-year low of 6.9 per cent in 2015. But some economists reckon real growth rates are already much lower than official data suggest.

Policymakers have said they will be able to ward off systemic financial risks, but concerns at top government levels about the dangers of excessive leverage appear to be growing.

China may suffer from a financial crisis and economic recession if the government relies too much on debt-fuelled stimulus, the official People's Daily quoted an "authoritative person" as saying last week.

Rising leverage in China and emerging markets in general is an even greater concern now that the possibility of another US interest rate hike this summer is back on the table. Higher rates will sap the ability of borrowers, especially commodity exporters, to make repayments at a time when global prices have crashed.

Emerging market corporate balance sheets are therefore likely to come under further pressure from debt payments and further currency volatility if the US dollar continues to strengthen, Moody's said.

Leverage has particularly jumped in China, with corporate debt to GDP at 170 per cent, and has risen notably in Turkey, Brazil and Russia, too.

Bank of International Settlements data showed total emerging market non-financial corporate debt has ballooned to nearly US$25 trillion dollar mark from around US$9 trillion before the crisis.

Even in India, one of the few bright spots in the emerging market landscape as a net-commodity importer which makes it a beneficiary of lower prices, a worrying lack of capital utilisation rates and falling investment as a share of GDP is a matter of concern, the authors noted.

REUTERS