China’s Capital Efficiency Posts First Improvement in Over a Decade: Moody’s

The first three quarters of 2017 saw China lift its capital efficiency levels for the first time in over a decade according to Michael Taylor, chief credit officer of Moody’s Investors Service.

Speaking to Caixin at the sidelines of the 8th Caixin Summit, Taylor said that China’s capital-output ratio reached a near peak of 6.5 in 2016, which meant that every unit of additional production required 6.5 units of capital investment.

Since the start of 2017, however, China’s capital-output ratio has seen its first decline in over a decade.

A lower capital-output ratio signifies improved economic efficiency, as it means that greater output is generated by means of a smaller capital investment.

“It’s quite modest but moving in the right direction,” said Taylor of the change.

Taylor said the big issue for China right now was whether the capital efficiency improvement is merely a one-off event triggered by specific conditions, or a sustained trend that will see economic productivity increase.

Following Moody’s downgrading of China’s sovereign credit rating earlier this year, Taylor said that the key to shoring up the country’s creditworthiness would lie in resolving “China’s Trilemma” ¬†of balancing economic growth, financial rebalancing and deleveraging.

Taylor said that the “golden scenario” would see China transition towards new drivers of economic growth that aren’t dependent upon debt, as well as the creation of better and more consistent financial regulation.

Leave a Reply

Your email address will not be published. Required fields are marked *