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Xi's ironclad grip on power will actually help China's economic reforms, says Moody's

Key Points
  • President Xi Jinping's consolidation of power in China with could help the country reform its economy, according to Moody's
  • On Wednesday, China officially announced its top echelon of leaders. Xi was once again at the helm and the absence of any heir-apparent underscored his absolute power in the country
Construction cranes work beside the statue of Mao Zedong in Yunnan Province, China.
Zhang Peng | LightRocket | Getty Images

The further consolidation of power in China under President Xi Jinping could help the country achieve its economic rebalancing and reform goals, Moody's said in a report released Friday.

The world's second-largest economy announced its new leadership lineup on Wednesday after a week of closed-door meetings and internal voting. That lineup saw Xi once again at the top of the country's ruling party, and it was notable for the lack of an heir-apparent — indicating that Xi was not ceding any of his authority anytime soon.

"We believe this consolidation could increase the alignment of incentives between the central leadership and other officials, and thus could advance the process of economic reform and rebalancing," Moody's Investors Service said in the report.

Market watchers have long been concerned about the nation's debt-fueled growth, industrial overcapacity and capital outflows that could possibly spur a global economic crisis.

Some investors are hoping that a stronger Xi will now be able to push through bold economic and financial reforms that will prevent the economy from a shock. Ongoing efforts for sweeping changes have been hindered by concerns about social stability and conflicts of interest.

The recent Communist Party Congress also saw Xi's name added to the party's constitution — making him only the second in-office leader to have that honor. In effect, anyone who now questions Xi's authority is doubting the entire edifice of the Communist Party.

"[I]t remains unclear whether the increased centralization of authority will result in an acceleration of the pace of reform or a continuation of the gradual implementation of economic liberalization, which balances other policy objectives such as maintaining relatively strong growth and the strong role of state-owned enterprises observed in recent years," said Michael Taylor, Moody's chief credit officer for Asia Pacific, according to a release.

While Moody's is looking for either an increased or stable pace of reform, some doubt just how serious Beijing is about changing up its economy — given the short-term societal costs that would be associated with liberalizing state-dominated markets.

This is one big misunderstanding about China's Xi Jinping

Moody's Investors Service in May downgraded China's credit rating to A1 from Aa3, changing its outlook to stable from negative, citing concerns that efforts to support growth will spur more debt.

But the ratings agency still has positive things to say for the East Asian giant on Friday, as Moody's projects that China will likely reach its target of doubling per capita income from its level in 2010 by 2020. This will give the government some room to focus on achieving other goals such as sustainable growth and alleviating economic inequality, Moody's said.

"In particular, we expect a greater focus on the quality of growth to result in a greater emphasis on promoting productivity, mitigating the negative environmental impact of growth and reducing financial vulnerability," it added in the report published Friday.

Those developments will be credit positive, Moody's said.

The analysis house already sees some success in the decelerating the rate of growth in borrowings.

"We expect the government to continue its push to contain leverage through structural reform and to contain financial risk, unless GDP growth slows substantially," Moody's said.