Chinese stimulus helped boost our resource prices

Australia has been a surprise winner from China’s growth slowdown because of the efforts its government has made to stimulate business investment with cheap credit and infrastructure investment.

This has kept prices for Australia’s key resource exports far higher than anyone expected.

China spent 18 per cent more on its imports from Australia last year at a time when its purchases from other major trading partners fell. Iron ore and coal prices have been close to double Treasury’s budget estimates and the flow of company tax revenue from the resource companies is driving the return of the budget to surplus.

This should continue, with China’s authorities yesterday revealing they would cut their value added taxes and further lift investments in road and rail in an effort to ensure the new growth target — a range of from 6 to 6.5 per cent — is achieved.

However, it will be a tussle, with the slowing momentum in the economy threatening to overwhelm the efforts of the authorities to support it.

Premier Li Keqiang was surprisingly frank in his presentation to China’s National People’s Congress yesterday. “Instability and uncertainty are visibly increasing, and externally generated risks are on the rise,” he said. “Downward pressure on the Chinese economy continues to increase, growth in consumption is slowing, and growth in effective investment lacks momentum.”

Mr Li said the authorities would not resort to “strong stimulus policies”, which is code for flooding the economy with cheap credit. This has been the chosen tool for achieving growth targets since the global financial crisis, but has left a legacy of mounting bad debts.

Debt remains part of the remedy, with local governments permitted to issue more bonds to fund infrastructure while a target for debt growth of 9.8 per cent has been set. Tax cuts worth the equivalent of $150 billion are designed to boost both consumption and business investment.

In the short term, these measures should support demand for Australia’s export commodities. In the longer term, the Chinese authorities face a losing battle.

China’s slowdown has no single cause. Simply getting banks to lend more is no longer generating increased output while heavily indebted companies are finding it harder to finance investment. Slowing global trade growth, including the effect of US tariffs, is hurting an economy traditionally geared to exports.

There are also demographic factors. The tidal movement of peasants to the cities is ebbing, bringing an end to the easy productivity gains. And the population is ageing, which increases the incentive to save.