China focuses on quality of growth to cut imports and boost domestic consumption, Moody's says

The country's increased reliance on domestic supply has the potential to shift its trade patterns, the rating agency says

China’s economy, which was first to recover from the pandemic, expanded 4.9 per cent in the third quarter of this year. AP

China will be focused on the quality of economic growth rather than its pace, as it looks to reduce its vulnerability to international markets and increase domestic consumption, Moody’s Investors Service said.

An increased focus on domestic markets has the potential to shift trade patterns and may also alter the products and services produced in the world's second-largest economy, Moody’s said in a research note released on Tuesday.

As part of its effort to boost domestic consumption, the government is also looking to improve household income and living standards, the ratings agency said of the key policy guidelines Beijing released ahead of its new five-year plan to be announced in early 2021.

"Amid rising tensions with the US and an ageing population, we see the Chinese government increasingly focused on reducing vulnerability to international supply chain disruptions, boosting domestic consumption and productivity, and increasing the sustainability of economic growth," Lillian Li, Moody's vice president and senior credit officer, said.

"The credit effects of these initiatives vary by sector, with the central, regional and local governments bearing the brunt of the economic cost, while companies in the technology and clean energy sectors stand to benefit."

The US and China, the world’s two biggest economies, have been engaged in a tit-for-tat trade war in recent years with the US restricting access for Chinese companies to its technology. Beijing’s trade spat with the Trump administration is ongoing and the Covid-19 pandemic has added to supply chain disruptions, prompting China to devise plans for alternative sources of supplies, especially for its technology giants.

“The external environment has become less favourable for China: ongoing tensions with the US, supply chain disruptions from the coronavirus pandemic and deglobalisation,” Moody’s said.

“Increased reliance on domestic supply will increase self-sufficiency – supported by domestic supply chains – and China's ability to meet its domestic market needs, particularly the production of critical goods such as technology, medical supplies, chemicals and others related to national security.”

China’s economy, which was first to recover from the pandemic, expanded 4.9 per cent in the third quarter from a year earlier. Growth may slow to just over 2 per cent this year – the weakest in more than three decades – but it is still much stronger than other major global economies.

China’s President Xi Jinping earlier this month signalled his long-term vision for the Chinese economy to the Communist Party leadership, targeting a doubling in size of the economy by 2035. This would represent an average growth of less than 5 per cent a year, well below the historical trend over the past 30 years.

To achieve its ambitions, China will have to increase productivity by upgrading manufacturing industries and developing more advanced technologies.

“Along with the commitment to reducing carbon emissions by 2035, these measures will add to existing pressures for the general government's fiscal balance sheet,” the ratings agency said.