The world’s most watched economy continues to perform at slower rates than in previous years as its economy responds to a range of prompts, not least of which is the tightening of credit conditions. China’s size and complexity make accuracy in determining its economic trajectory and drivers for growth challenging, but the RBA Board’s Monetary Policy Meeting made a solid effort at doing so on 1st March. Here, we summarise the comments about China.
Much of East Asia has experienced lower economic growth, measured in terms of Gross Domestic Product (GDP) in part due to their exposure to China’s slowing growth.
Prospects for the continuation of this lower growth scenario for China appear to be evident in the data, with lower industrial and real estate sector activity than in the prior year. The real estate sector remains especially vulnerable, with total sales falling over 2015. However, in February Chinese authorities supported the housing market, including where prices have been lowest.
For several years, China’s economic growth has been tied to two inter-related factors. First, increases in China’s working age population and the continued migration of agricultural workers to urban areas where they shifted from agricultural production to industrial activity. Second, and directly related, increases in national productivity, including that required to fuel China’s massive export boom of the last decade.
More recently and most tellingly, as the nation ‘ages’ the working-age population has started to decline. Although urbanization is continuing and still appears to have more room to grow, at least on international comparisons. In total, productivity growth has slowed over the last decade, with the limits of the power of urbanization to deliver productivity gains perhaps having peaked some time ago.
To maintain its economic development, Chinese authorities encouraged investment growth fuelled by high household savings levels and during and subsequent to the global financial crisis, by the expansion of credit to the productive economy. At a sector level, debt grew to significant levels.
While this delivered economic growth initially, it created conditions that the RBA describes with characteristic dryness:
“Slowing aggregate growth and excess capacity in some industries had raised the risk that some firms would find it more difficult to make repayments on their debt, which could, at some point, be associated with more widespread financial problems.”
Despite this caution, China’s debt-to-income ratios and low levels of foreign currency debt mark it out from many other emerging economies.
The implications for Australia, according to the RBA, are that the over hang of residential housing stock and excess capacity in productive industry will reduce demand for Australian raw materials.
Just as it was the bedrock upon which China’s economic expansion and growth were driven, the sheer weight of its demography, and in particular, the ageing and urbanization of its population, are likely to be the cause of the middle-kingdom’s economic challenges in coming years.
The Reserve Bank of Australia’s Monetary Policy Meeting Minutes are available from http://www.rba.gov.au/monetary-policy/rba-board-minutes/
