A rebound in Chinese economic growth is good for Australian shares.
By Shane Oliver, AMP
Several indicators are pointing to a recovery underway in China after its economy slowed sharply late last year - highlighted by a slump in gross domestic product (GDP) growth from a peak of nearly 13 per cent in 2007 to just 6.1 per cent in the March 2009 quarter.
There has been much talk of 'green shoots' of recovery globally but these signs have been much stronger and more broad-based in China. Talk of a hard landing (defined as 6 per cent or less annual growth in China) is now giving way to confidence that GDP growth this year will be around 8 per cent.
Talk of a recovery in China has been met with disbelief by many; the most common concern is that Chinese growth is dependent on the US consumer market and if that remains weak then so will China.
Implications for Australia
China is now Australia's second-largest export market so any recovery in Chinese economic growth is good news for us. Chinese domestic demand, particularly the surge in infrastructure spending now being seen, and stronger consumption growth over time, is highly commodity-intensive.
Coming off the back of cutbacks in the supply of commodities, China's economic recovery is likely to be positive for commodity prices, which already look as if they are starting to recover. A recovery in China should also start to help boost growth in other trading partners across Asia.
After the fall in bulk iron ore and coal prices flows through to Australia's terms of trade, we should start to see an improvement in export earnings from later this year.
Strengthening commodity prices are also good news for the Australian dollar, which has probably seen its lows for this cycle.
Chinese policies are bearing fruit
During the December quarter last year the focus of Chinese policymakers swung aggressively towards boosting their economy in the face of the sharp downturn then underway.
A massive fiscal stimulus package focused on infrastructure spending was announced, monetary conditions were eased aggressively, various industry support plans were released, the gradual appreciation of the renminbi came to an end, and policies to promote consumption were stepped up.
The evidence clearly suggests this is bearing fruit:
- Money supply and loan growth has surged.
- Fixed asset investment has picked up to a 30 per cent year-on-year pace from a low around 22 per cent in December.
- Industrial production is growing again.
- Real retail sales growth has remained strong.
- Surveys of business conditions in manufacturing and services sectors have improved for five months in a row.
- Property sales are rising.
- The downswing in Chinese exports appears to be diminishing, reflecting the stabilisation in global conditions.
The broad-based nature of the pick-up in China suggests it is more than just a bounce associated with the end of the inventory de-stocking cycle. The improvement in manufacturing conditions points to an acceleration in GDP growth this year.
These considerations suggest a recovery is in progress and growth is back on track to be around 8 per cent this year.
But is it real?
There will no doubt be setbacks along the way but there are good reasons to believe the rebound now being seen in China is sustainable. First of all, consumer spending in China has a huge potential for strong growth. Unlike in countries such as the US and Australia, where consumption accounts for around 60-70 per cent of GDP, in China it has fallen to less than 50 per cent. So there is significant potential to push it back up.
Several considerations are worth noting:
Despite common perceptions, Chinese consumption has actually been growing very strongly. It is just that business investment and net exports have been growing faster. This reflected a combination of factors, including economic policies designed to boost investment and exports, which were partly motivated by a desire to ensure China did not become vulnerable to a withdrawal of foreign capital as occurred in the Asian crisis. There are also strong levels of household savings as the social safety net was wound back last decade.
The Chinese Government has shifted to promoting more balanced growth with much greater emphasis on consumer spending. With the global crisis highlighting the downside of being too reliant on exports, this adjustment has been stepped up and includes an emphasis on boosting consumption. Policies designed to reduce household savings include measures to boost social security, moves to raise health insurance coverage from 50 per cent to 90 per cent of the population, labour reforms to boost wages, tax concessions and subsidies to purchase cars and real estate, and specific assistance for rural workers.
Chinese per capita consumption of consumer items is a fraction of that in advanced economies, suggesting there is significant pent-up demand. For example, in China there is one car for every 60 people compared with almost one for every two in the US and Australia. Living space per person in China is about 10 per cent of what it is in the US and Australia. Between 15 and 20 million people are moving to the cities every year, attracted by higher incomes, which generates strong demand growth for housing and consumer goods.
Household saving is very high and household debt is miniscule. Household debt is just 14 per cent of GDP in China, compared with 60 per cent in Europe, 100 per cent in the US, 104 per cent in Australia and 110 per cent in the UK. So China's households will not be constrained by the more restricted credit environment and de-leveraging that will hold back many developed countries in the next few years.
None of this is to say Chinese consumers will save the world, and without a quick return to strong export growth it is hard to see Chinese growth quickly returning to 11 per cent or more. However, it does indicate there is significant scope for strong growth in consumer spending to underwrite sustained Chinese growth of 9 to 10 per cent per year.
In short, while many developed countries are constrained by structural problems in the form of high debt levels, China's downturn has been mainly cyclical and structural forces remain tailwinds for growth.
About the author
Dr Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital Investors.
Attractive dinning set, couldn't say NO to it, only thing worried me might be the oversided glass top, but who cares, I am still very into those romantic fairy tales, so complicated marble/stone liking design just helped me decided all - take home without further consideration, accept whatever comes.
The mirror is not in the best position it should be, suppose to be right on dinning set, but this way just gives convenience to bro & me before stepping out the door, so be there, not too bad ah.
My little display coner, all girly stuff, perfum collection, aroma sets, essential oil, and of course several bottle of wine, even I am not a drinker, but couldn't resist to show off.
White Sofa, this is the only thing I hope didn't invest money in, too difficult to maintain & take care of & not as comfortable as those massage sofachairs. Shouldn't be so childish just simply fall in love with the looking, after all, this is the one will hold me for yrs. Just like BF, choose the right one but no need to be handsome - lol, im genius, can be thinking of relationship from an unwanted sofa.
46" LCD TV wanted here, too expensive so far, no hurry to buy in, choose the right one will be priority, see, I learn from my sofa expeirence.
Bro's bathroom, bit small for him, but good to have this, after a week long busy, would be quite relexing if can take a wkd aroma bath.
Pics say it all - Kitchen!!!
Corner of stairs with this dull simpson, cute one though.
Again, fairy tales, a little over.
