RBA keeps faith in China growth story

GLENN Stevens has given a vote of confidence in China’s high-growth economy, but there are signs not all is well with it.

The RBA’s confidence in China’s growth contrasts with some pessimistic commentary about its outlook and a run of weak economic data.

RESERVE Bank governor Glenn Stevens has delivered a striking vote of confidence in the ability of the Chinese authorities to continue managing a high-growth economy.

In his testimony to the House of Representatives Economics Committee on Friday, Stevens commended the Chinese authorities for hitting their 2014 growth target of 7.5 per cent and said a target for 2015 of 7 per cent would be appropriate.

“They are by now … the largest trading economy in the world. An economy of that size growing at 7 per cent is still quite an impressive performance, if they can do that,” Stevens said.

It was impossible to say whether the target would be achieved, but Stevens said: “They have done a pretty good job of managing things thus far. I would say there are few countries that could better their track record of growth — I cannot think of any.”

Growth anywhere between 6.5 per cent and 7.5 per cent would be a good result for a country China’s size. Stevens said the main challenge for China was not managing its growth but rather handling the financial excesses left by a period of double-digit growth. “So far, so good, but that will inevitably remain an open question.”

Stevens remains confident in the ability of the Chinese authorities to manage the financial system, including the so-called “shadow-banking” or unregulated sector where most of the problems are believed to lie. “As far as I can see, they are across the issues and are managing them fairly well.”

The bank’s confidence contrasts with a burst of pessimistic commentary about China’s outlook, which is drawing on a run of surprisingly weak economic reports over the past two months.

Diana Choyleva, the well-­regarded China analyst at British research group Lombard Street, put out a note last week discounting the official growth figures, saying they were inflated. She estimates China’s growth was only 4.4 per cent last year and only an annualised 1.7 per cent in the December quarter.

What is ­taking place in China is more than a simple “maturing” of its growth to a more sustainable pace.

Steel production is a benchmark of industrial production, construction and infrastructure development. Over an eight-year period through to 2008, it averaged 20 per cent growth a year — enough to quadruple in size. In 2014, growth was 1 per cent, according to the World Steel Association. Steel exports soared because domestic consumption of steel was falling.

Electricity consumption, which is also seen by many as an independent check on the official growth figures, rose by only 3.8 per cent in 2014 — half the rate of the previous year and a fraction of the 20 per cent rate reached before the financial crisis.

The latest official manufacturing survey shows firms are reporting falling output (although growth in the number of firms means total output will still be rising) for the first time since late 2012. Heavy industry is suffering from excess capacity built during the credit boom that followed the financial crisis.

But Choyleva contends that the weakness is more widespread than that. Imports have been falling, with the January figures down by 19.9 per cent (exports were also 3 per cent lower). Much of this reflects the fall in the prices of major commodities like oil and iron ore. However, Choyleva notes that imports excluding raw materials also fell sharply, suggesting problems with demand.

The shake-out in China’s property market is continuing, with prices falling across the country, including in the major cities. There are hopes that this may be drawing to an end, with sales volume picking up in December, but there is a large overhang of unsold property. Excess capacity is plaguing both property markets and heavy industry.

The economy is not falling in a heap — the latest car sales figures have been good and retail, which softened in the September quarter, has lifted since. And intra-regional trade is still showing good growth, as are China’s exports to emerging markets beyond Asia. But there are signs that all is not well. The financial sector seems to be facing a rising tide of trouble. Total lending in January was down 21 per cent from a year earlier, reflecting the clamps on shadow banking but also the reluctance of banks to lend to small and medium enterprises.

China’s foreign exchange reserves, which mesmerised the world as they rose towards $US4 trillion, are starting to be run down as capital flows out of the country, reflecting both a loss of confidence in the economy and expectations that the authorities will seek to devalue the yuan. Outflows reached $US100bn in the December quarter.

The World Bank’s latest review of the world economy provided a central forecast that China would achieve growth above 7 per cent this year but warned that “a sharper decline in growth could trigger a disorderly unwinding of financial vulnerabilities and would have considerable implications for the global economy”.

China now takes a third of Australia’s exports and, including its influence on demand from other countries in Asia, shapes close to half Australia’s trade, so there is a great deal at stake.

The RBA’s February monetary policy statement said the health of China’s property market was a risk facing the Australian economy, noting that conditions remained “subdued” despite attempts by the authorities to support construction activity.

The RBA has a dedicated team tracking the Chinese economy, including someone posted in Beijing. Stevens and his senior staff have regular personal contact with their counterparts at China’s central bank.

Stevens has at various times expressed frustration with the gloomy prophesies about China — there were waves of pessimism about its outlook in late 2011 and late 2012 when growth appeared to falter before recovering. However, the weakness is increasingly evident in the numbers.

His optimism about the Chinese outlook before the economics committee on Friday may require some marking to market as the year unfolds.