In their rush this morning to play up the OECD report on the global economy (very gloomy, growth slumping, unemployment soaring) and on Australia (relatively optimistic), the media overlooked what is happening in China.

Specifically they missed the downgrade of Chinese growth from the World Bank to a 19-year low of 7.5%. That compares with the IMF forecast of 8.5% and the OECD forecast in the same report of 8%.

Seeing growth in the September quarter was 9% and 11.9% in 2007 and above 12% 18 months ago (all annual rates), China’s slowdown is distinctive and worrying, even with the $US586 billion stimulus package.

This is still impressive growth, and 7.5% isn’t to be sneezed at, but it is below the 8% level that some western economists feel is a line in the sand in China where employment stops growing and unemployment starts rising.

In parts of northern China in and around the steel and metals bashing provinces and through Guangdong, there’s anecdotal reports of factories closing, steel mills, coal mines and power plants shutting, factories, processing plants and other facilities on short time. But the big problem in China isn’t industry, exports or factories, according to the World Bank, its housing, just as it is in the US, UK, Spain, new Zealand, Ireland and possibly Australia.

The pricking of China’s housing boom will help cut growth to that forecast 7.5% next year. That will be the fourth lowest growth rate in the country since the launch of reforms three decades ago.

The last time we saw China’s economy in a similar slowdown was in 1990 – a year after international isolation following the Tiananmen massacre the year before – when it grew by just 3.8%.

“Weakness in the real estate market, partly reflecting an earlier tightening in macroeconomic policies, is now feeding through to several ‘upstream’ industries such as cement and steel. Looking ahead, private sector investment is likely to be weighed down by the unfavorable external prospects and continued weakness in real estate,” the World Bank said.

“Private consumption growth is likely to soften in 2009, but will receive some support from fiscal policy.”

Sound familiar? it’s what’s happening in the US, Ireland, Spain, New Zealand, UK and all economies where the housing bubble has popped: the credit crunch is the cause, and its making it worse, but collapsing housing prices and levels of demand are impacting the wider economies in these countries. According to the World Bank, China is no different.

The World Bank said that to meet the challenges, especially from housing, the country should do more to rebalance its economy from investment, exports and industry to consumption and services as it rolls out a the $US586 billion stimulus package.

The Bank said in the report that “Additional measures are necessary to make headway with rebalancing the pattern of growth.”

It said these steps should include extra spending on health, education and social welfare and raising energy and resource prices.

The bank said increasing spending in these areas would reduce the reluctance of Chinese consumers to spend.

“The impact of the global financial crisis is spreading, the report says, with risk aversion and deleveraging leading to a funding squeeze that affects demand in many countries. This includes many emerging markets that, as a group, buy more than 50 percent of China’s exports and until recently continued to see strong import growth,” a summary of the Bank’s country report on China said.

“In terms of the effect of China’s slowdown on the world, there’s good news and bad news,” said David Dollar, World Bank Country Director for China in the Bank’s statement.

“China’s recently announced stimulus package is good news because it will keep China’s growth rate up at a pretty healthy rate and so imports will continue to go into China at a fairly good rate.

That’s good news for countries like Mongolia and Australia that export commodities like copper and iron ore to China – it’s also welcome news for countries selling primary products, machinery and parts to China. The bad news is there won’t be as much stimulus to these exporting economies as China was giving in the past.”

That’s what China watchers at the RBA and Treasury fear, the question is how much stimulus will there be from 2009 onwards?

Peter Fray

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