October 17, 2017 / 4:57 AM / 10 months ago

Fitch: China Party Congress to Signal Policy Continuity

(The following statement was released by the rating agency) HONG KONG/SINGAPORE, October 17 (Fitch) China's 19th Party Congress is an opportunity for the leadership to signal a shift in policy priorities towards structural reform and could be a platform for stronger implementation of President Xi Jinping's agenda if, as is widely expected, he consolidates his power. However, the most likely outcome is a status quo scenario, characterised by continued adherence to high growth targets and only gradual steps on supply-side reforms to boost productivity and stabilise debt levels, says Fitch Ratings. There is broad consensus that Xi will strengthen his political power at the Party Congress, which begins on 18 October and marks the end of the president's first five-year term. The implications for policy may not become clear until policy priorities are set at the Economic Work Conference in December and official 2018 targets are announced at the National People's Congress in March. It is possible that Xi's consolidation of power will pave the way for more aggressive implementation of the structural reforms that were hinted at when he first took power. Under this scenario, policy would focus on addressing economic imbalances and excessive leverage, allowing the market to play a more important role in the economy, and taking steps to boost productivity, particularly in the state-owned sector. We believe such a shift would reduce medium-term risks to financial stability and lift China's long-term growth prospects. However, official statements under Xi's leadership have contained mixed messages on adopting a more market-based economic framework, despite the promises laid out in the 2013 Third Plenum documents. It was telling that the government quickly shelved reforms and fell back on policy stimulus and capital account measures in 2015-16 when growth targets and macroeconomic stability were threatened. Stabilising measures have been successful, but the government's ability to meaningfully tackle the economy's main structural challenges will be limited without greater willingness to accept a more pronounced slowdown in economic growth than currently implied by medium-term growth targets. Strong export performance has weakened the trade-off between growth and reform this year - which has allowed the authorities to clamp down on shadow banking activities - but we do not expect this to continue. The authorities may therefore be reluctant to shift focus towards reform, as it would risk missing the ultimate policy goal of recent decades - building a "moderately prosperous society" by 2020. This long-term policy target has remained consistent through China's previous political transitions. It was first mentioned by Deng Xiaoping as far back as 1979 and is now formalised as a doubling of 2010 GDP by 2020. It is the first step of what Xi has described as China's Two Centenary Goals, with the second step aiming to turn China into a "prosperous socialist country" by 2049. The economy would need to continue growing between 6.0%-6.5% a year to achieve the 2020 goal. Given this, the authorities are likely to remain committed to high GDP growth targets. We expect financial regulation to remain high on the policy agenda to contain risks in the financial sector, but deleveraging is likely to be delayed at least for the next few years. Reform of state-owned enterprises is also likely to remain slow. Fitch forecasts GDP growth will slow only moderately, to 6.3%, in 2018 and remain above 6% in 2019. We assume some drag from the cooling property market, but there are upside risks to the forecast if the authorities opt to counteract this with looser policy. It remains possible that the Party Congress could mark a transition towards deeper and more accelerated reforms. Nevertheless, the more likely status-quo outcome of gradual reform, along with continued adherence to high growth targets and rising leverage, would add further risks to long-term macroeconomic and financial stability. Contact: Andrew Fennell Director Sovereigns +852 2263 9925 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central Hong Kong Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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