Fitch: China Signals Long-Term Reform, But Implementation is Key

Thu Nov 14, 2013 8:00pm EST

HONG KONG/SINGAPORE, November 14 (Fitch) China's recently concluded third Plenary Session suggests the country's top leadership perceives a need for structural reform, says Fitch Ratings. Recent announcements could lay the groundwork for measures that help rebalance the economy - and thereby limit the build-up of further stresses on the sovereign credit profile. However, we do not view these announcements as a definitive roadmap for, or last word on, reforms, as may have been anticipated by many market participants. China is only at the start of a busy policy-making calendar leading up to the National People's Congress in March. The main factor weighing on China's sovereign ratings is the unsustainability of its current investment-led and credit-fuelled growth model. The post-session communique provides two important signals which suggest that the authorities are approaching this issue. One signal is the increased emphasis on the market for allocating resources, including basic inputs such as financing, power, water and land, with the government consigned to a regulatory role. This could ultimately erode an implicit subsidy long enjoyed by large firms, and prove important for a more efficient allocation of capital. This is significant, as investment has risen to just short of 50% of China's GDP - a rate which is without parallel and likely to be unsustainable. But any expectation of a rapid adjustment in the way investment allocation is decided has been tempered. This is because the authorities have also reiterated the dominant role played by state-owned enterprises - which have driven much of the country's investment. Another signal is the establishment of a central leadership team on reform. Chinese state news agency Xinhua reported that " ... the team will be in charge of designing reform on an overall basis, arranging and coordinating reform, pushing forward reform as a whole, and supervising the implementation of reform plans". There were other notable announcements which hinted at fiscal reforms to improve the alignment of income and spending responsibilities between local and central governments; financial reforms that gradually introduce liberalisation by the establishment of additional Free Trade Zones (FTZ); and land reforms to facilitate further urbanisation - by the provision of greater property rights to farmers. Lacking so far is a further detailed report on the indebtedness of local governments which the State Council has asked the National Audit Office to undertake, updating an earlier version done in 2011. Fitch awaits this report and more detailed statements on policy initiatives to inform its ongoing assessment of China's sovereign creditworthiness and the direction of the ratings, currently 'A+'/Stable. Andrew Colquhoun Senior Director, Sovereigns Tel: +852 2263 9938 Aninda Mitra Senior Director, Fitch Wire Tel: +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. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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