China's authorities have reemphasised the need for the country to build ’common prosperity’, with the goal of lowering income inequality and improving the social safety net to achieve long-term economic sustainability. Policies to meet this objective will shape the country's growth path and have far-reaching effects for many types of debt issuers.
In the short term, there will likely be increased credit risks resulting from a period of regulatory uncertainty. Longer term, two different scenarios could emerge: in the first one, regulatory uncertainty would be prolonged and discretionary intervention would increase, with negative effects on the private sector, productivity and efficiency. In the second scenario, policy implementation would be more effective in addressing structural imbalances, positive for productivity, the overall economy, and social stability.
The key implications of the agenda are outlined below.
» Policy shifts focus on sustainable growth, reducing income inequality. The goal of the common-prosperity plan is to strengthen regulation, lift incomes, improve wealth distribution and enhance the social safety net.
Near- and long-term credit effects of ‘common prosperity’ policies
Source: Moody's Investors Service
China’s urban income inequality has surged along with higher income levels
Sources: World Bank, Our World in Data and Moody's Investors Service
» In the near term, regulatory uncertainty is the key credit risk. Transition risks could arise from lack of predictability and unclear communication around policy implementation, which could deter foreign and private investment, and discourage big-ticket consumption.
» Prolonged uncertainty could produce more negative outcomes. Under this scenario, policy uncertainty would continue for longer, with negative effects on private investment, productivity, capital efficiency and growth relative to Moody’s forecasts.
» In the medium to long term, effective implementation would be positive for sovereign credit quality. Potential long-term benefits include higher consumption, lower excess savings and more sustainable growth. Changes that lead to a broader tax base could help provide the resources to fund a more extensive social safety net.
» Longer term impact on companies depends on regulatory and social risk exposure and ability to adapt. The policies could pose different risks and opportunities depending on the sector and individual company. It poses risks for luxury goods makers, high-end property developers and internet platforms that have benefited in the past from lax regulation. But companies that cater to mass-market consumers will likely benefit as the population of lower- and middle-income earners grows, along with their purchasing power.
To understand more about the ‘common prosperity’ agenda, please download the full report here.
Please feel free to reach out to the rating experts below regarding this article.
Lillian Li, VP-Sr Credit Officer/CSR
Moody’s Investors Service
[email protected]
+86.21.2057.4028
Michael Taylor, MD-Credit Strategy
Moody’s Investors Service
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+65.6311.2618