Moody's warns of prolonged effects of property market

The prolonged effects of China's property market slowdown could hurt economic growth, but reforms to balance the economy will offset the negative impact, Moody's Investors Service said yesterday in Shanghai.

China's gross domestic product growth may slow to 5-6 percent from 7-7.5 percent this year if property sales and building construction both fall by 10 percent, Tom Byrne, senior vice president of Moody's Asia-Pacific and Middle East sovereign risk group, told a forum.

The effects would be more prolonged than in the two most recent downturns as the impact is set to spread through banks, supply chain, and government finances, Moody's said.

But China's sovereign rating will not be downgraded if policies are in place to nurture the economy for the long term, Byrne told Shanghai Daily on the sideline of the forum.

He saw the massive buildup of debts and opaque operation of local government borrowings as the major risks to China's rating. He said the government should urgently slow credit growth and make borrowers more accountable for the loans.

"It is a very inefficient use of capital if borrowers take money from banks or shadow banking system while expecting somebody else, such as the local government, to repay the money. That will lead to further economic slowdown in the long run," Byrne said.

Although the decision to control local government debt and allow the market to play a "decisive role" are credit positive, it may take another two years for the effects to filter through, he said.