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

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

An increased give attention to domestic markets gets the potential to shift trade patterns and could also alter the product or service stated in the world's second-largest economy, Moody’s said in a study note released on Tuesday.

Within its effort to improve domestic consumption, the federal government is also seeking to improve household income and living standards, the ratings agency said of the main element policy guidelines Beijing released before its new five-year plan to be announced in early 2021.

"Amid rising tensions with the US and an ageing population, we start to see the Chinese government increasingly centered on reducing vulnerability to international supply chain disruptions, boosting domestic consumption and productivity, and increasing the sustainability of financial 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 monetary 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 recently 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 put into supply chain disruptions, prompting China to devise plans for alternative resources of supplies, specifically for its technology giants.

“The external environment is becoming 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 increase self-sufficiency - supported by domestic supply chains - and China's capability to meet its domestic market needs, specially the production of critical goods such as for example technology, medical supplies, chemicals and others linked to national security.”

China’s economy, which was first to recover from the pandemic, expanded 4.9 % in the third quarter from a year earlier. Growth may slow to just over 2 % this year - the weakest in a lot more than three decades - nonetheless it is still much more robust 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 might represent the average growth of less than 5 per cent a year, well below the historical trend in the last 30 years.

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

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