Updated: 2012-07-17 (China Daily) - China is likely to see a soft landing despite the slowdown in growth in the second quarter, but renewed reliance on investment to support activity threatens to prolong the Chinese economy's structural imbalances, Fitch Ratings said in a report on Tuesday.
"The investment-led strategy to support growth in the second half, backed by monetary easing, is likely to avoid a hard landing in the short term, but only at the cost of postponing a resolution of the economy's structural imbalance toward investment," said Andrew Colquhoun, head of Asia-Pacific Sovereign Ratings with Fitch Ratings, in the report.
This suggests structural issues will continue to weigh on China's long-term foreign currency rating of "A+" with a stable outlook and local currency rating of "AA-" with a negative outlook, he wrote.
China's growth slowed to 7.6 percent in the second quarter, the weakest reading since first quarter of 2009. Fitch maintains its 8 percent projection for Chinese growth in 2012, implying annual growth of 8.1 percent in the second half.
Fixed asset investment growth picked up 20.4 percent year-on-year in the first six months, up from 20.1 percent until May. Monetary policy has been supportive, with two benchmark rate cuts in June and July. New bank lending of 920 billion yuan ($144 billion) outperformed analysts' expectations in June.
Gross domestic capital formation, a measurement of net additions of fixed asset investment, reached 46.2 percent of China's GDP in 2011, up sharply from 40.5 percent in 2008, Fitch's report showed.
The steep step-up in the investment-to-GDP ratio amid the global recession of 2009 was associated with a further decline in the incremental output generated from each RMB of investment, of which China's rate was already below that of comparable large emerging markets such as Brazil and India," Colquhoun said.
Avoiding a hard landing would support China's ratings, but a further skewing of the economy toward reliance on investment will exacerbate a factor that Fitch has identified as a structural weakness in the sovereign credit profile," he added.