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Moody's Raises Global Outlook, China Factories Hum In Shadow Of Debt Risk

Moody's Raises Global Outlook, China Factories Hum In Shadow Of Debt Risk
As China grappled with debt risks and tried to shake off a stinging ratings downgrade from Moody's Investors Service, investors worried about slowing growth in the world's second-biggest economy were reassured as the country’s industrial engine cranked up again in May.
Even as it warned of a slowdown in China later in the year as liquidity-tightening measures take effect, Moody's sees an improving global outlook.
Although an opinion poll in Britain pointed to the danger of a hung parliament in elections next week, the ratings agency said the biggest risks to global growth, including protectionism and European Union exits.
In line with the official target of at least 6.5 percent, Moody's expects 2017 growth for China at 6.6 percent.
After a run of weak readings of April data, China's official Purchasing Managers' Index (PMI) eased worries about a sudden slowdown. Up versus forecasts of 51.0 in a Reuters poll, the PMI was at 51.2 in May, steady from April's 51.2.
"The latest official PMI readings add to broader evidence that downward pressure on growth has eased lately," said Julian Evans-Pritchard, China Economist at Capital Economics.
"Looking ahead, however, we suspect that the current stability... will prove temporary. With the regulatory crackdown on financial risks still weighing on credit growth, it will be difficult to avoid a further slowdown in the coming months."
The onshore yuan hit a four-month high against the dollar and Chinese stocks edged higher.
Supported by an increase in new orders, activity in China's steel industry grew at the fastest pace in a year in May. Climbing above the 50-point mark that separates growth from contraction, the steel sector PMI rose to 54.8 from 49.1 in April.
With U.S. President Donald Trump's administration keen to tackle what it regards as China's "unfair and illegal" sales of underpriced steel, trade headwinds remain a risk.
The reliance on the investment-led model has raised questions about whether it will be sustainable given official pledges to cut debt levels of nearly 300 percent of GDP even as the steel sector helped drive China's strong first-quarter growth.
Moody's cited the contradiction between using stimulus to meet growth targets and trying to reduce debt in the economy in cutting China's sovereign rating for the first time in nearly 30 years last week.
How far Chinese authorities will go in their attempts to curb bubble risks is the big question for investors.
Though investors worry that a significant credit contraction in China will reverberate through financial markets and the global economy, most analysts argue that Beijing will tread carefully for fear of knocking the economy hard.
Taking production to its highest level since 2008 and growing at the fastest pace in almost six years, factory output in Japan in a positive sign.
The election of Emmanuel Macron as French President, which reduced the risk of a European Union exit by a major country, was one factor that Moody's said had improved the outlook.
While the opposition Labour Party could gain nearly 30 seats, a new constituency-by-constituency modelling by YouGov showed the Conservative Party might lose 20 of the 330 seats it holds in Britain, which is negotiating its exit from the bloc.
Shaking investors' confidence that May would easily win a majority in next week's national election, the news came after a string of opinion polls showed a narrowing lead for Theresa May's Conservatives.
As Brexit-related uncertainty weighs on consumer spending and investment, Moody's singled out Britain as one of the advanced economies that shows signs of slowing.

Christopher J. Mitchell

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