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China Trades Immediate Economic Growth For Uncertain Benefits

Sep 20, 2022, 07:00 pm

It's a change of heart that some have waited for, but very few expected. China has decided to prioritize structural reforms above current economic growth.

The change came with little warning. And various hypotheses have sought to explain it. Whatever the reason, S&P Global Ratings believes the immediate impact is to weaken business and consumer confidence, which in turn exacerbates the economic effect of anti-pandemic restrictions.

"China's tolerance for slower growth is painful but deliberate, in our view, and partly reflects its focus on addressing some underlying weaknesses in its growth model," said S&P Global Ratings analyst KimEng Tan.

"We believe the country's domestic saving pool is big enough to fund its immense needs and prevent damage to credit support despite eroding near-term investor sentiments," Mr. Tan said.

Even in more negative scenarios, we believe the government still holds powerful policy tools.

Most importantly, China's large domestic saving pool would help to head off serious damage to credit support. It remains hard to tell how significant the longer-term credit benefits of these immediate sacrifices will be.

Safeguarding the strong economic growth that underpins the China 'A+' sovereign rating means ensuring economic and financial stability without alienating private business.

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