Up until recently it had been widely thought that China’s economy would be relatively immune to the global financial crisis which began unfolding in July last year. Since China runs a large current account surplus, its growth rate is not dependent on its ability to access foreign capital, or the price at which it does so.
Nonetheless, China is one of the world’s largest exporters. And although exports represent a smaller share of China’s GDP than they do of the GDP of many other, smaller, Asian economies, they have nonetheless been a significant driver of China’s rapid growth in recent years, both directly and via the fixed investment which they have helped to induce. Around 45% of China’s exports go to the EU, the US and Japan, markets which are either in, or on the brink of, recession. Not surprisingly, therefore, growth in China’s exports has begun to slow.
Using the export price deflator published by China’s National Bureau of Statistics to adjust the US$-denominated figures for the value of China’s exports for price increases and for the appreciation of the renminbi, it would appear that growth in the volume of Chinese merchandise exports has halved, from over 25% per annum in the early months of last year, to around 12% pa during the six months ended August. This backs up some of the anecdotal evidence, such as that reported by Colleen Ryan in the Financial Review early last week, that firms in some of China’s key exporting regions, such as the Pearl River delta and around Shanghai, have been experiencing much more difficult trading conditions.
In other words, China’s financial system may well be “decoupled” from the global financial meltdown, but its economy isn’t completely decoupled from the global business cycle.
The fact that the People’s Bank of China cut its benchmark interest rate two weeks ago, for the first time since January 2002, and marginally lowered reserve requirements for all but the five largest banks, suggests that the Chinese authorities are also conscious of downside risks to China’s growth, and are willing to do something about them.
Now that China’s inflation spike has begun to reverse — with the headline inflation rate dropping back from 8.5% in April to 4.9% in August — there is room for further reductions in interest rates. And China has considerable capacity to deploy fiscal policy to keep economic growth above 8% — widely regarded as the minimum necessary to ensure that sufficient jobs are created in urban areas to absorb the migrants arriving each year from rural areas — should it be necessary to do so (as well it might).
Australia’s economic relationship with China is the biggest thing differentiating our economy from New Zealand’s (which, as we know from the release of its June quarter national accounts last Friday) is “officially” in recession. In most other respects, New Zealand’s and Australia’s fundamentals are very similar: the banking system is identical and regulated in much the same way, both countries have large budget surpluses (and hence ample capacity to use fiscal policy to bolster growth if necessary), both have had an extraordinary housing boom which has now ended, both have highly indebted households and (as far as one can tell, given the sketchy data on the NZ corporate sector) rather less highly geared businesses.
The extraordinarily large gains Australia has made from its trading relationship with China, and the flow-on effects that has had for business investment, immigration and so on, provide a large part of the explanation as to why our economy is still enjoying positive growth (albeit rather less so than a year ago) while New Zealand’s growth rate has turned negative; and why our housing market is still on a broadly even keel while on the other side of the Tasman house prices are now clearly declining.
Were China’s economy to experience a major slowdown, our chances of avoiding a recession such as New Zealand is now experiencing would be much reduced. That said, I don’t think China will experience a major slowdown, although their growth rate will be somewhat less this year and next than it was in 2006 or 2007. Hence, I think it remains more likely than not that Australia, too, will “dodge the bullets” that are currently coming our way from offshore.