Keep an eye on China

Concern over the effects of the housing ‘crunch’ on the broader Chinese economy was the main topic of discussion at a recent Institute of International Finance China Economic Forum, held in Shanghai.

While in the minority at the forum, some speakers were worried that the correction under way in the housing market was severe, and could lead to a sharper, economy-wide slowdown. 

They noted that residential construction starts (in terms of floor space) plunged 27 per cent from a year earlier in the March quarter, and 25 per cent in April. House price increases are also coming down fast, even in ‘tier one’ cities. 

A nagging concern is that overbuilding in lower-tier cities, the crackdown on shadow banking, and an increasing tendency by wealthy people to buy a second or third property overseas rather than locally could prolong the drag from the construction downturn. 

Most participants, however, were confident that the recent slowdown would be brief, and that mini-stimulus measures and firming demand for exports would pull the economy around by the second half. This would keep the economy on course for a soft landing, with growth of around 7.25 per cent in 2014 and 7 per cent in 2015. 

As far as Australian exporters are concerned, the risk of a sharp property-led cyclical slowdown poses short-term risks. It would act as a drag on non-resource exports, as well as commodity prices and volumes.’ 

Looking further ahead, the Chinese economy is likely to experience further decline in its growth rate, due to population ageing and workforce shrinkage plus a slowing of the productivity growth that can be harvested from rural-urban migration.

The economy is also undergoing rebalancing, including a push for cleaner, greener growth that will probably mean a lower commodity intensity of GDP.’ 

A slower-cleaner-greener growth isn’t necessarily all bad news for exporters, however.

Demand for commodities is likely to grow more slowly than in the past, but not decline in trend terms. There will still be hefty appetite for commodities, including from urbanisation and public housing programs. 

Ultimately the rebalancing of the Chinese economy is unlikely to mean fewer or flagging imports from Australia. But it is likely to change the mix, with the increments increasingly coming from non-resource areas spurred by the rising incomes of an expanding middle class.