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S&P: China holding back stimulus to limit credit impact amid trade tensions

China is limiting its new economic stimulus program to put a lid on its credit impact, a move to hedge against volatility amid trade tensions with the U.S., S&P Global Ratings concluded in a research report.

Earlier in March, China lowered its economic growth target for 2019 to a range of 6% to 6.5% from its 6.5% growth target of the past two years. The current stimulus round will focus on easing infrastructure investment, accommodating monetary conditions and cutting taxes.

S&P Global Ratings said the tax cuts, which could total 1.5 trillion yuan, will benefit the manufacturing, mining and retail sectors the most. The rating agency expects tax cuts to enhance corporate cash flows but does not anticipate an improvement in consumption and capital spending, which have been fading.

The rating agency forecast an expansion of 8% to 10% in infrastructure investment, after just 3.8% growth in 2018. The Chinese government expects to keep money supply and aggregate financing in line with nominal GDP growth.

S&P Global Ratings expects funding conditions to improve for good-quality firms, but less financially stable firms should face difficulties in issuing bonds.

In a separate report, Moody's said the slashed growth target combined with tax cuts will raise debt pressure.

The rating agency noted that the Chinese government increased the quota for special purpose bond issuance by 60%, which is expected to hike direct debt of Chinese regional and local governments to 83% of fiscal revenue in 2019 from 77% in 2018.

Moody's also expects governments to face increased scrutiny if they wish to obtain funding.

As of March 18, US$1 was equivalent to 6.71 Chinese yuan.