The answer is concerning. China has grown to dominate the Australian economy, providing 25% of our imports and taking another 25% of our exports. Ever since the early 2000s the price of resources has been high and that is due to Chinese demand. Building homes and highways for a billion people will use a lot of iron ore and coal. That has made Australia rich.
Now China is in strife. Their economy has always had problems, but the great thing about growth is you can make a big problem look small if you grow fast enough. China’s economy has put money into many questionable things over the years, but has always had the income to pay for its mistakes and avoid financial meltdowns.
Now, however, financial missteps and low growth are coming together in a slow-moving car crash. The financial missteps (or at least the ones we know of) mostly relate to Chinese property developers. Country Garden and Evergrande come to mind.
Those massive companies were overstretched. They owe a lot of people a lot of money and are having major problems paying it back. In late October Country garden defaulted on its bonds, meaning it failed to pay back people it owed money to. That is the sort of thing that can cause contagion—if players in the financial system are worried that other players have lost money to Country Garden, they can start pulling assets out and creating a general collapse.
One measure of the lack of confidence in the Chinese system right now is their stock markets.
After peaking in 2021 the CSI 300 and the Hang Seng are both down significantly, as the next chart shows.
Financial crises are common in developing countries and the surprising thing about China is they haven’t really had one during their record 30-year run of mega-growth. That’s why their run of growth is so rare, really. Financial crises tend to create recessions that are “more severe and longer lasting” than other kinds of recessions”, according to IMF researchers.
China’s shadow banking system is a major worry for regulators who are unable to scrutinse the nature and number of bad loans being written. And China’s shadow banking system is huge. Regional governments are also a major part of the financing system and they could be the next domino to fall.
“In China, weakening economic momentum, a deepening property sector downturn, and growing strains on local government financing weigh heavily on market sentiment,” wrote IMF authors in a financial risk report published in October 2023.
All these financial imbalances are building up just as China’s growth slows. The days of 10% or even 8% growth are long gone now. China is aiming at 5.2% growth this year and despite some good numbers in the third quarter, not all observers are confident they will make their annual target (even if the official statistics will say they did).
No wonder private sector economists are bearish. “China’s structural economic downturn will continue,” wrote ANZ Bank chief economist Raymond Yeung in a note to clients in October 2023. “The data improvement does not represent a turnaround in fundamental challenges, such as worsening demographics, a lack of productivity improvement and trade tension.”
China’s economic health is our economic heartbeat. If they flatline, we will need resuscitating too. A slump in Chinese growth would cause a collapse in Australia’s exports, our dollar, our tax revenue, our profits, our stockmarkets, and our superannuation balances. It would cause growth to slow to a crawl and jobs to be lost.
The people who gained employment in the recent strong labour market tend to be young and less educated. They’re the ones who are benefiting. And they are the ones who will be tipped out first if the economy starts to wobble
It isn’t good that our economic future is in the hands of Xi Jinping and his comrades, but this is the lot of a medium-size trading economy. We used to depend on the UK, then the US. Now it’s China. Perhaps there’s a chance we can hitch our wagon to India’s ascent if China falters but their economic structure is different to China’s and India is frankly more likely to take our jobs than buy our minerals.
Credit: Source link
