The decision by China’s central bank to raise the one-year lending and deposit interest rate by 25 basis points should at least raise a little question mark about just how strong demand will be in the next couple of years for Australia’s minerals industries.

Sunday’s rise is the second time the central bank has increased interest rates in 2010 and takes the one-year lending rate to 5.81 percent and one-year deposit rate to 2.75 percent. The PBOC increased the benchmark lending and deposit rates by 25 basis points on October 20, which was the first time in almost three years.

Curbing inflationary pressures and especially a boom in building prices is the reason for the monetary tightening but a consequence may well be an overall curbing in the country’s growth rate. Australia, which survived most of the hardships of the global financial crisis because of Chinese growth staying around or above the nine per cent mark, may have to get used to something less than that in the coming few years.

Michael Pettis, a Senior Associate at the Carnegie Endowment for International Peace and a finance professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets, discusses the prospect of a growth rate and writes that we should be prepared for average growth numbers, “perhaps in the 3-5% range.” In a recent posting on his china financial markets blog, Prof. Pettis writes how a recent article in the People’s Daily trumpeted a Merrill Lynch report that said 9% growth was the “new normal” for China.

The Chinese economic growth is forecast to slow to 9.1 percent in 2011, from an estimate of 10.3 percent this year, and the 9 percent growth is expected to be a new norm for China in the post-crisis period, Bank of America Merrill Lynch said in a regional economic outlook report released on Tuesday.

After fluctuations since late 2008, China’s gross domestic product (GDP) growth has stabilized at about 9 percent in both year on year and sequential terms, in comparison with the average 11-percent growth in years before the crisis, said the report. … From 2012 to 2015, the report forecast the Chinese economy is likely to expand by 9 percent, 8.5 percent, 8 percent and 8 percent, respectively. And for the subsequent five years of 2016- 2020, China’s GDP growth might average at 7 percent.

“It is interesting,” wrote Prof Pettis, “that the consensus is starting to shift downwards, and that 9-10% for the rest of the decade is no longer the default expectation, but I am not sure that even the Merrill Lynch numbers are plausible. I think too many economists are seriously underestimating how difficult the transition to a new growth model is likely to be. Still, we are starting to see a shift in expectations.”

Prof Pettis has almost no doubt that during 2011 all the growth expectations are going to be revised sharply downward. By the end of next year, he suspects that the consensus will be that for the rest of the decade we should expect growth rates in the 6-7% range for China. But even that, in his opinion, is likely to prove too high.

He would argue that we should be prepared for even lower average growth numbers, perhaps in the 3-5% range. But he thinks the consensus next year will migrate down to the 6-7% range, even though next year’s growth should remain high – probably in the 9% range.

Such a sharp slowdown in Chinese growth is not necessarily bad for the world but it will be very bad for commodity exporters – or at least non-food commodity exporters, since the Professor thinks the demand for food from China will continue strong – but the overall effect on the rest of the world depends on the evolution of China’s trade balance. A contraction in the surplus creates net demand for the world, and so might even be marginally positive.

This marginally positive outcome won’t be evenly distributed, of course. Non-food commodity exporters will be badly hurt, while commodity importers and manufacturers will benefit.

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Peter Fray
Peter Fray
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