It’s taken a while but the reality of China’s economic vulnerability is at last seeping through the consciousness of Australia’s business media. David Uren at The Australian today points to the inadequacy of last week’s RBA Statement of Monetary Policy on China:
Although a serious crisis in Europe would hurt China, the RBA shows little concern about the current direction of the Chinese economy, where it says growth appears to have “stabilised at a more sustainable rate”.
It voices its confidence in the ability of China’s authorities to act “aggressively” in the face of any more serious slowdown.
Australia’s future appears to rest on the hope that China’s central planners make a better fist of it than Europe’s have.
Exactly right. Our entire economic vision summed up in the final sentence. At the AFR, there is more sensible and deeper inquiry. First from Robert Guy:
Pressure is rising on Beijing to commit to more stimulus after last week’s slate of weaker than expected numbers for retail sales, exports, imports, industrial output, new loans and fixed asset investment.
The debate about Beijing’s response has focused on interest rate cuts and lower bank reserve requirement ratios. But there are signs officials are being enticed again by the siren song of fixed asset investment.
…But if growth comes under more pressure, then banks may be compelled to open the lending spigot.
That could exacerbate what China economic expert Michael Pettis refers to as the country’s “inverted” balance sheet.
The risk refers to China’s liabilities (debt) getting bigger amid pressure on the asset or operational side of the balance sheet (the real economy).
…It doesn’t take into account Beijing’s contingent liabilities linked to local governments, major banks and state-owned enterprises. A surge in local government spending on projects of dubious value risks exposing Beijing to bailouts.
It was only a year or so ago that this view was completely heretical. Now its mainstream enough to appear in the AFR. There’s more from Alan Mitchell:
Time is pressing. Maintaining the current high rate of high investment will add to overcapacity and could lead to deflationary pressure, bankruptcies, and large financial losses. It also could drive up exports and further depress the prices of manufactured goods, accelerating the decline in China’s terms of trade and increasing protectionist pressures in the West.
Countries cannot go on overinvesting indefinitely. Inevitably, there must be what the IMF describes as a sharp correction in investment spending with “significant negative implications for growth”.
…The lead-up to the change of government in Beijing has created its usual backlog of deferred decisions.
Everyone will rest easier if there is now an acceleration of the reform needed to put China’s growth on a safer footing.
Everyone but us. This inevitable transition is great for the world and China itself but pretty awful for Australia (see here for more) as it by definition means lower fixed asset investment, lower commodity demand and much lower commodity prices.
Which is perhaps why our economic Mandarins don’t want to discuss it. On the assumption that there’ll be no end to Chinese commodity demand growth, they’ve encouraged an economic transition built in some measure on sand.
Time to face reality. What is Plan B?
