China's economic rebound strengthens in 2021 amid global recovery, Moody's says

The world's second-largest economy will continue to draw support from domestic policies and robust external demand

A cargo ship loaded with containers berthing at a port in Haikou, in China's southern Hainan province. The country was one of the first to recover from the pandemic-induced economic headwinds. AFP

China’s economic rebound has strengthened and become more broad-based since the beginning of this year, as the world’s second-largest economy continues to recover at pace from the pandemic-induced headwinds, according to Moody’s Investors Service.

Although the momentum of China’s growth is likely to slow later this year compared to the first half of 2021, the country's economy will continue to draw support from “domestic policies and robust external demand, as the global recovery gathers pace”, the ratings agency said in a statement on Monday.

"With the growth outlook seeming more secure, the government is shifting focus towards its other policy objectives that include rebalancing of the economy toward domestic consumption, maintaining employment growth and stabilising economy-wide leverage," Lillian Li, a Moody's vice president and senior credit officer, said.

China was among the first countries to emerge from the pandemic driven-economic slowdown that tipped the global economy into its worst recession since the 1930s. The International Monetary Fund expects the country's economy will grow 8.4 per cent this year, outpacing global economic expansion of 6 per cent in 2021.

China's manufacturing base is strengthening and its exports have bounced back amid strong global demand as economies across the world open up.

Chinese exports grew almost 28 per cent in dollar terms in May from a year earlier. Although below the pace in April, May exports were well above historical growth rates, Bloomberg said, citing China’s customs administration data released on Monday. Its imports soared 51.1 per cent, the fastest pace since March 2010, leaving a trade surplus of $45.5 billion for the month.

A resurgence in Covid-19 cases in India and South-East Asia has disrupted production in those countries, potentially directing more export orders to China, economists at Citigroup wrote ahead of the latest export figures.

On the domestic front, Chinese policymakers are focused on containing “systemic risks in the financial sector”, Moody’s said.

“Liquidity conditions are becoming more balanced, which will dampen overall bank loan growth,” the ratings agency said. “Shadow banking assets will likely retreat further in 2021 as regulatory scrutiny tightens."

The economic recovery and softening stimulus-led investment growth will stabilise the economy-wide leverage ratio and growth in government leverage. Output losses on the back of the pandemic-related restrictions had led to a jump in economy-wide leverage in 2020, Moody’s said.

Manufacturers of communication and electronic equipment have led the country’s recovery, followed by electrical machinery, automobiles, chemicals and pharmaceutical companies.

Although profitability has risen substantially for both privately and state-owned enterprises, long-standing issues of restricted access to credit, limited economies of scale and exposure to more vulnerable sectors continue to plague private companies.

A faster-than-expected domestic policy normalisation or further waves of the pandemic are risks to China's growth outlook over the next 12 months. Maintaining exchange rate stability amid more volatile capital flows is also a challenge, Moody’s said

“A relaxation of the capital controls regime would be another challenge given it remains an important buttress against financial stability risks,” Moody’s said.