Plenty of China upside

The Chinese steel industry may be facing years of consolidation, according to Deloitte China chief economist Sitao Xu, but the nation’s economy is more resilient than many pundits would have us believe.

Speaking exclusively to Business News in Perth, Mr Xu said Chinese consumers would have a lot of room to increase spending, with savings rates at an all-time high and the nation’s younger generation less likely to be worried about leveraging.

Although Mr Xu acknowledged that, while there was an oversupply of property in some smaller cities and an excess of capacity in China’s steel industry, he said it was likely there would be a continued urbanisation throughout the country.

“First of all I think when people talk about ghost towns, people have talked about it for ages,” Mr Xu told Business News.

“If you look at economic history, for an emerging economy quite often economic growth will make bigger problems smaller and smaller problems no problem.

“Quite often that’s the solution to so-called bubbles.

“So the big picture is still (that) China is a relatively poor country, per capita GDP is less than $US8,500, and almost 50 per cent of people live in the countryside.

“There’s still huge room for urbanisation.

“People are very eager to improve their standard of living.”

One potential move to help ameliorate the excess of supply would be to accelerate reforms to allow farmers to sell land at market price, Mr Xu said.

“In the medium term we could face this inventory overhang in the building industry… that really explains the fact that, in certain industries in the old economy, consolidation is going to be more than a short-term story,” he said.

“It’s going to be a multi-year journey, in the steel industry particularly.”

Deloitte partner Matt Judkins said the overhang of production would have an effect on Western Australia, with iron ore demand growth likely to be lower as excess capacity was removed from the steelmaking industry.

And steel exports will not be a fix either, Mr Xu said, despite big growth in China’s sales of steel to overseas buyers.

He saw the rise of protectionism in the developed world as an indication the growth in steel exports was unsustainable.

Ultimately, external and internal factors indicated the size of that particular industry would need to be reduced, he said.

Positive

Mr Xu was positive about Australia’s economy, saying that, from China’s perspective, the country was in relatively good shape compared with the eurozone, for example.

And he was bullish on China’s prospects, with annual economic growth of 4 or 5 per cent growth still a significant number. The country’s target is 6.5 per cent

That growth target came at a cost, he said, with fiscal stimulus resulting in a requirement for a higher degree of leverage, something that would need to be resolved in the medium term.

“What has often been overlooked is really Chinese consumers,” Mr Xu said.

“Chinese consumers have a lot of dry powder.

“Saving rates (are at) an all-time high.

“Young Chinese … don’t have any aversion to debt – they’re optimistic.

“Having said that, the economy has certain problems.”

Mr Xu also pointed to the need for a political commitment on the economy, particularly with regard to making certain industries smaller and closing government-owned companies.

In the long term, he sees a smaller role for ideology in China, particularly as young people are becoming depoliticised.

Bilateral

Mr Judkins said the recent China-Australia Free Trade Agreement would provide plenty of opportunities for Australian industry, particularly in services and agribusiness, although more work would be needed to build relationships.

He warned against complacency, where people might start to think we can sell whatever we want into the Chinese market.

WA in particular would benefit from its time zone, he said, with a large portion of the world’s population within an hour (zone) or two in either direction.

Mr Xu said although China had not been involved in the Trans Pacific Partnership process, its pursuit of bilateral agreements had provided other opportunities.

That included, in addition to the Australian agreement, work with the Association of South East Asian Nations and with South Korea.