The outlook for China and its dependants


There are a lot of unknowns and contradictions when it comes to China. The state of its banking sector will be the decisive factor in whether a hard or soft landing is accomplished.

While the institutions themselves are reporting high profits and a large deposit base; the levels of debt, the quality of the assets backing that debt and the ensuing property bubble are cause for concern.

Now that Rio Tinto has become a key customer of the China Beijing Metals Exchange, affording the mining company the option of selling additional iron ore to China, it would imply that there is still a demand for basic resources. Conversely, we’ve seen BHP Billiton recently state that the demand for iron ore is flattening.

From an Australian iron export standpoint, a slower China is at first glance bad news. But a weaker dollar could help see a pickup in other areas of industry such as retail and tourism.

The recent revision of GDP to 7.5 per cent from the initial 8 per cent forecast this year is a set-back. Compared to the expected growth from Western economies, however, it’s not exactly recession territory.


The prospect of an economic slowdown in China has been one of the chief preoccupations of global stock markets, as each new piece of data is carefully pored over by economists and investors. Certainly, there has been some weakness of late, which has raised the prospect of the much-feared “hard landing” for the world’s second-largest economy. But ultimately, I don’t think there is much likelihood of a significant reduction in economic growth. Beijing itself might have pruned back its growth forecasts, but the Chinese economy is still expected to grow at a rate that would make Western politicians’ eyes water. Nonetheless, the knock-on effects are still being felt throughout financial markets, with the Aussie and mining stocks being the most obvious victims. Both of these have enjoyed returns predicated on continuous Chinese growth, and so naturally have taken something of a hit. However, it’s still too early to write off China, and the relentless pace of growth in this economy suggests there is still more upside to come. Other possible areas that will continue to do well out of China will be consumer goods, with the Chinese appetite for luxuries set to keep expanding. The east is not quite so red anymore, and it offers great promise.


The recent Chinese slowdown has not been a big surprise to many of us given the fact that many of the Eurozone countries are expected to fall into recession this year, and the Chinese are a big exporter to these countries. China has been growing at a fast pace over the last decade but this can only last as long as the importing countries can afford to sustain it. With the Eurozone still looking likely to contract for the rest of this year at least, things are likely to get worse for the Chinese. The knock-on effect of this will therefore fall on the commodity based countries such as Australia and New Zealand, where we have already seen the Australian dollar falling 5 per cent against the US dollar since the end of February and most analysts predict much larger falls. However, it’s not all bad news for China which is also a big exporter to the US, and given its initial return to growth following positive employment and consumer confidence numbers since the start of the year, along with new rumours of a third round of quantitative easing, things could still turn round for it seeing it return to its recent growth levels quicker than expected.


The big question that’s been on everyone’s lips so far this year has been: will it, won’t it have a hard landing. Curve balls have been thrown at investors as China itself reduced its GDP forecasts for this year and other important growth data over the past few weeks has been softer than expected, all of which has got the bears jumping up and down saying I told you a hard landing was imminent. The worst thing is that some economic measures have been contradicting themselves making what is often a murky picture when it comes to the state of the Chinese economy even fuzzier.

It’s important to appreciate how significant the world’s second biggest economy is to the global picture. It is a crucial part of the puzzle that’s keeping the global economy from crashing. If it does suffer a bigger deceleration in growth than is expected, then the ramifications will be felt all over.

But as things stand a hard landing is unlikely and certainly not in anyone’s interest. Its rate of inflation is relatively low and so it can afford to turn the stimulus tap on if required. The moral of the story is not to underestimate the Sleeping Dragon.