China must accelerate the pace of financial reform in coming months to sustain economic growth, ratings agency Moody's Investor Services said, forecasting the world's No. 2 economy will grow 7.5 percent each year from 2012 to 2014.
Expectations of steady expansion means China is unlikely to suffer any economic hard landing, or abrupt slowdown, Moody's said, but warned that the days of easy growth for the world's fastest-growing major economy are over.
Difficult financial reforms that make space for a more market-driven system must be made to cut inefficiencies, it said. At the same time, China no longer enjoys the wide berth it had before to bolster growth in unforeseen downturns.
Without more market-based price signals driving the efficient allocation of capital and improving the competitive delivery of services, China's trend growth rate will likely slow more rapidly than otherwise, Moody's said in a report.
Crucial areas of reform include increasing market-based competition, improving regulation to allow greater certainty and transparency on future rules and decisions, and making China's hulking state firms more efficient, Moody's said.
While these changes should uncover new engines of growth, the road will not be smooth sailing.
The 4 trillion yuan stimulus from Beijing four years ago that led to explosive growth in China's local government debt and rapid expansion of its banks means the country can no longer indulge in a credit binge if the economy swoons, Moody's said.
Banks were especially imperilled by China's previous credit extravagance, it said, noting China's total bank assets doubled in the past four years, leaving them exposed to industries now mired in excess production capacity.
Total assets in China's banking system are now worth 240 percent of the country's gross domestic product at 113.3 trillion yuan ($18.2 trillion), substantially higher than any other major emerging economy, Moody's said.
As a result, the agency judged Chinese bank asset quality to be negative for the next 12-18 months, even though it assessed the banking system to have a stable outlook in the period.
China's stabilising economic growth has arrested the uptick in its banks' bad loan ratio, Moody's said, and there are no indications that asset quality will worsen materially in coming months.
DOUBTS OVER BAD DEBTS
China's four biggest state-owned banks which control about half of the country's total bank assets all have non-performing loan ratios of below 1.5 percent, drawing criticisms from analysts who say the numbers