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How worried do we need to be about China’s slowdown?

Shanghai’s financial district, the Bund. <em>(Photo: Getty)</em>
Shanghai’s financial district, the Bund. (Photo: Getty)

There are three significant concerns investors have about China at the moment: its slowing growth; high levels of debt; and, of course, its long-term trade spat with the US.

And since Australia is an important trade partner of both supernations (China is Australia’s biggest export destination), Aussie investors are rightfully anxious about being caught in the crossfire.

But is China’s economy as dire as headlines might suggest?

According to a note by AMP Capital chief economist Shane Oliver, everything’s been a bit blown out of proportion.

“Concerns about China’s rapid debt growth are overstated,” he wrote. “China’s economy is slowing, but not collapsing.”

Here’s Oliver’s low-down on the state of China right now.

Yes, China’s slowing – but it’s not all doom and gloom

China saw 6.6 per cent GDP growth last year, which was slightly above expectations but still down from 6.8 per cent growth in 2017.

Investment across industrial production, retail sales, and fixed asset investment are showing slowed growth in 2018 to multi-year lows, Oliver acknowledged, but it’s “all still pretty solid compared to most other countries.”

Annual growth in exports and imports also went south during December, and Chinese manufacturing conditions have also dropped sharply.

But on the upside, China’s housing prices are rising and its services sector is holding up well.
“Services are less affected by trade wars and the services sector is expanding relative to the manufacturing sector,” the chief economist pointed out.

“This may partly explain why GDP growth in China is now smoother and does better than expected with most commentators focusing on the old manufacturing sector.”

On top of this, China is moving to provide policy stimulus that will further boost services demand in China and will be less bruising than its 2008 and 2015-16 stimulus programs.

What about its ‘debt time bomb’?

This is a commonly expressed fear about China given that its non-financial debt to GDP ratio has nearly doubled from 150 per cent ten years ago to almost 300 per cent, Oliver noted.

But China’s debt problems aren’t the same as other countries.

“First, China has borrowed from itself – so there’s no foreigners to cause a foreign exchange crisis.

“Second, much of the rise in debt owes to corporate debt that’s partly connected to fiscal policy and so the odds of a government bailout if things go wrong are high.

“Finally, the key driver of the rise in debt in China is that it saves around 45% of GDP (roughly double that in developed countries) and most of this is recycled through the banks where it’s called debt,” Oliver said.

So what China needs to do is to save less and consume more – but boosting consumption takes time and a more progressive tax system and enhanced social welfare.

And how about the trade war?

The tit-for-tat tariffs and one-step-forward-two-steps-back trade talks were a big source of share market volatility last year and did much to injure investor sentiment, and therefore investment, in both countries.

But mounting pressure on both ends means it’s quite likely that both nations will reach a deal, especially US President Donald Trump who won’t want to see a recession or his 2020 re-election campaign prospects derailed.

“As such we see roughly an 80 per cent chance that a deal is reached – either before the March 1 deadline for negotiations or after an extension,” Oliver wrote.

So what does this all mean for investors?

“A sharp slowdown in China would be a double whammy for the Australian economy coming at the same time as the housing downturn.

“But while it’s a risk, it’s not our base case. Rather, our outlook for China’s economy to stabilise and growth to pick up a bit in the second half implies a reasonable – but not spectacular – outlook for commodity prices.”

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