The Chinese economy’s credit-fuelled, investment-led growth is reaching limits. Rebalancing is necessary. Those are key judgments from the April edition of EFIC’s newsletter, World Risk Developments.
‘Anxiety about the Chinese economy is growing, and coming from two directions – rising bad debt in the financial system and slowing growth’, says EFIC’s chief economist Roger Donnelly.
Credit rating agency Fitch downgraded on April 9 China’s long-term local currency debt from AA- to A+, citing high debt levels that might ultimately require the central government to bail out banks and local governments. Then March quarter data released last week showed year-on-year GDP growth slowing to 7.7%, from 7.9% the previous quarter.
‘The bigger uncertainty about the growth outlook concerns rebalancing, not financial system risk’, says Donnelly.
‘If worse comes to worst, the central government should be able to afford a bailout of local governments or (once again) a recapitalisation of banks. But if growth slows further because of falling investment and sluggish consumption, it is unclear what Beijing will do.’
Previous incoming administrations have often launched large investment programs to shore up their economic credentials, the newsletter notes. Yet the fifth-generation leadership of President Xi Jinping and Premier Li Keqiang has expressed strong support for rebalancing and seems prepared to accept lower growth as long as this does not cause significant unrest. So another big stimulus in the event of a downturn isn’t assured.
What are the implications of these growing pains for Australian business? With China now Australia’s largest export market, accounting for 25% of goods and services exports, interest in the ups and downs of the Chinese economy is understandably high.
‘There are two issues to consider’, according to Donnelly. ‘First, the short-term downside risk of a slowdown brought on by financial difficulties. This would have obvious knock-on effects to Australia. Second, the medium-term outlook. Here there is reason to believe China is settling into a lower growth range than before, perhaps 7-8%.’
How would growth in that range translate into Chinese demand for Australian exports? ‘Here opinion divides’, says Donnelly, ‘depending on the view you take about international commodity prices and China’s ‘commodity intensity of GDP’.’
‘On a dim view, growth of resource export volumes to China becomes sluggish, or even falls, and the prices received for those exports also fall.’
‘A perhaps more plausible view is that China’s commodity intensity of GDP remains high for a while yet as it completes its industrialisation and urbanisation. This in turn keeps resource export volumes growing, though prices may come off as new worldwide supply capacity starts production. Better still, a rapidly growing Chinese middle class generates new demands for services such as tourism and education which Australian suppliers capture a share of.’
