It wouldn’t matter if China went into a recession - we have nothing to worry about
It wouldn’t matter if China went into a recession - we have nothing to worry about; China’s apparent property collapse has the usual suspects talking about another hard landing for what must be the 10th year
China’s apparent property collapse has the usual suspects talking about another hard landing again -- for what must be the 10th consecutive year. Noting how frequently these calls are made, and noting how frequently those who make these calls are wrong, my own view is that I don’t think we have anything to worry about. That is, there isn’t a great risk of China falling into a recession at this point. Even if there was it probably would not even matter that much for Australia apart from a short-lived market panic attack.
Now I realise this isn’t the common wisdom, but then again, common wisdom isn’t all that wise most of the time. Especially when sprouted by economists or policymakers. According to that view it would matter a lot. We might even have that much called for and long-awaited -- with much relish -- recession. China is a $10 trillion economy after all and set to become the world’s largest over the next 10 years or so.
That’s not to say it wouldn’t matter at all. We might have some temporary confidence shock and our stocks and currency would sell off. I don’t think that impact would be sustained however, and looking through the noise, I think Australia would get along just fine.
Firstly, China is big -- but it is not the be-all and end-all. This is hype. To see this, consider that while China is our largest export market -- taking about 30 per cent of our goods exports, they’re really only our largest market for iron ore, copper and gold. For our other large bulk export, coal, Japan ranks ahead of China, and even then, exports to China are roughly comparable with exports of coal to India (coking) and South Korea (thermal).
Most importantly, for our soon-to-be booming energy exports, China is a minor player compared to Japan, and perhaps even South Korea going forward. Other than that, our financial markets aren’t especially intertwined, and we rely more on the US, UK and Japan for the bulk of our investment and capital needs. That is, a Chinese recession isn’t going to cause a credit crunch.
Now consider what an actual Chinese recession would look like. It is not going to be like what we see here or in the US. They’re not going to get negative growth anytime soon especially as the government’s balance sheet is pristine and policymakers have ample capacity to use their monetary levers.
Think back to the GFC in 2009 -- China was widely regarded as being in a recession with a growth rate of 6 per cent! And that was with a global credit crunch. Now, I don’t think we would ever get there, other than by policy design, but if we did, and from Australia’s perspective, that’s still strong growth and unlikely to affect our export position too much.
All through that last recession, exports of iron ore from Australia to China, continued largely unabated, down only 1 per cent for that year, and that was during a global credit crunch, when global trade froze.
In any case, in the ensuing year, ore export volumes surged 16 per cent. That’s still exceptionally strong growth over a two-year period during a global credit and trade crunch. Needless to say, a localised Chinese recession now wouldn’t be anywhere near as dramatic. So since that time, average annual growth in iron ore volumes to China has been something like 11 per cent. A recession now might see that slow to between 7 and 9 per cent or something -- that’s hardly a disaster.
Another way to think about things is with reference to the Japanese experience. Up until recently, Japan was our largest export market. Now over most of that time, Japanese growth has been extremely weak, lucky to average 1 per cent per annum. The lost decades remember? Indeed over the past five or six years, Japan has barely grown at all -- we’re talking a decimal point here, not much above zero. At the same time, Australian exports to Japan have averaged growth of about 8 per cent (4 per cent volumes) per annum -- and that includes the GFC.
Japan’s lost decade hasn’t really been a big event for Australia. We still export a lot of stuff to them, and the chances are they’ll be our biggest export market again once liquid natural gas exports fire up. This from a country that’s stagnant. How would a recession in China, a country three times the size of Japan’s, with a ‘recessionary’ growth rate of 6 per cent or so, then be harmful to Australia? It clearly wouldn’t. With that in mind, it’s not so much the case if China sneezed would Australia catch a cold. It’s more the case that if China sneezed would we even notice?
Whether the iron ore bust turns into a major bust for the economy will depend upon employment. The price effects of the income shock will also be distributed via the labour market in lost jobs and weak wages. Unfortunately, we are already at the threshold of a large labour market shock as the broader mining boom unwinds. In the next twelve months the Gorgon, APLNG, QCLNG, GLNG, Roy Hill and Sino Iron projects will shed some 35,000 jobs directly and many more when we apply appropriate multipliers.
Most official forecasts have unemployment peaking at 6.25%. It’s already at 6.4% in seasonally adjusted terms but the better measure is the trend at 6.1%. Amid the iron ore shock, the only way that unemployment will hold at these levels is if households spend like drunken sailors to stimulate services investment and jobs (assuming governments don’t spend). The housing boom will help them do so but it’s a tough ask carrying such a load. Unemployment is therefore likely to continue to grind higher as strong immigration outpaces jobs growth. A sudden fall in the dollar would also help.
Whether Australia actually enters recession is rather academic. It’s going to feel like a recession and many prominent stock market sectors are going to remain in atypical bear markets in defiance of the cyclical global recovery. A recession is a very real risk if the various headwinds for households overwhelm sentiment in the investor-driven housing boom. Were house prices to begin to fall then there would be nothing supporting domestic demand at all and the turn would be swift and the fall heavy given the shaky internals of investor-led mortgage growth. For that reason you can expect interest rates to remain low and probably go lower.
Even so, the economic challenge presented by the iron ore crash is formidable. Conservative investment allocations are the order of the day. The Australian dollar is your friend.
At the Summer Davos forum, China’s premier responded to concerns about China’s economic strength.
By Shannon Tiezzi September 11, 2014
On Wednesday, Chinese Premier Li Keqiang reassured investors and business leaders that China’s economy is still on track, and that it remains a welcoming environment for foreign firms.
Li was speaking at the “Annual Meeting of the New Champions 2014,” a yearly summit organized by the World Economic Forum with a specific focus on the “next generation of fast-growing enterprises.” China hosts the meeting each year, with this year’s forum being held in Tianjin. The gathering is often referred to as the “Summer Davos” forum, a reference to the World Economic Forum’s annual winter meeting in Davos, Switzerland.
Li Keqiang delivered the keynote speech to open the Summer Davos forum, which he used as an opportunity to reassure financial and business leaders that “China has all the confidence, ability and resources to realize its major economic and social goals for 2014,” according to Xinhua.
Li emphasized that China is not “distracted by the slight short-term fluctuations of individual indicators,” some of which (such as electricity consumption rates) seem to indicate a sharp slowdown in growth. Li’s message was designed to restore confidence in the Chinese economy, and also to make it clear that Beijing is not shying away from its vision of structural reform to the Chinese economy. Signs of a slowdown in China were “inevitable and within our expectation,” Li said. He noted that China still expects to reach its 7.5 percent growth target for the year, although Li also emphasized that the government does not see this as an absolute goal. Beijing will be satisfied if China’s economic growth “in within the proper range,” as Li indicated it was.
Li’s bottom line was that China’s economy was settling into a “new normal state,” and economic fluctuations are just a symptom of the change. China’s main priority during this time is to keep employment up, Li indicated, giving the economy time to adjust. In the meantime, Li promised new reforms, including pilot programs for private banks, further reforms to state-owned enterprises, less red tape for businesses, and reforms to China’s business taxation system. Li spoke optimistically of “turning the gains of reform into new dynamism of development that would bring more benefit to the people.”
But Li’s task was not limited to reassuring business leaders about the strength of China’s economy. He also had to convince foreign business executives that their companies and investments are still welcome in China. Beijing is in the midst of anti-monopoly crackdown, which has ensnared Western giants Microsoft and Jaguar. The anti-monopoly drive sparked concerns that the government is using the crackdown as an excuse to hamstring foreign firms. A survey by the American Chamber of Commerce in China (AmCham China) found that 60 percent of respondents feel foreign business is less welcome in China than it used to be, Bloomberg reported. Another AmCham China report cited “growing perceptions that multinational companies are under selective and subjective enforcement by Chinese government agencies.”
Li addressed these concerns as well. He defended the anti-monopoly probes by saying that they target both domestic and foreign firms. In fact, according to Li, only around 10 percent of the companies involved are foreign. Li reassured foreign companies that China would seek to open further to foreign investment and business operations. He also promised to sternly penalize intellectual property rights infringement, another perennial concern of foreign firms operating in China.
20 years ago no one complained about house prices or unemployment levels or threats to their retirement accounts. Now 7 years after the big scare everyone is dealing with those issues on a daily basis. But that's ok, because it's normal to have your retirement security in jeopardy now, to have to fund your children's house purchases. To expect an unannounced visit to the manager's office any old day.
It's all normal now, so what's to worry about?
Shadow was hopelessly wrong about the Gold Bull Market. What else is he wrong about?
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