China's economic slowdown is still worrying the RBA

Worries about the Chinese economy and its impact on Australia aren’t new. But it’s clear over the past 24 hours that both the Reserve Bank governor and his Bank of England counterpart Mark Carney are still worried about where the Chinese, and by extension emerging markets more broadly, are headed at the moment.

In its monetary policy statement announced last night after it kept rates steady for the 80th month, the BoE said:

Many emerging market economies have slowed markedly and the Committee has downgraded its assessment of their medium-term growth prospects. While growth in advanced economies has continued and broadened, the Committee nonetheless expects the overall pace of UK-weighted global growth to be more modest than had been expected in August. There remain downside risks to this outlook, including that of a more abrupt slowdown in emerging economies.

You might recall worries about “conditions abroad” was one of the factors that kept the Fed from raising rates in September. That was taken as code for “China”.

From an Australian perspective it’s been clear that China remains a key driver of trader and investors’ perceptions of the Australian economy, its growth rate and the Australian dollar.

Indeed, Anthony Kirkham, Western Asset Management’s head of Australian operations, told a media briefing last week that “if you travel around the east coast of the United States the view is that Australia is in the bin. Investors are challenged by China and the housing market.”

He added that he thought that offshore investors have become a little more comfortable recently in buying Australia and the Australian dollar now that “the extent of the fall, and the speed” had slowed.

But, speaking yesterday, RBA governor Glenn Stevens, like the Bank of England, showed that concerns about China are still top of mind for the world’s top central bankers.

While the focus of his speech was on the clear message that the RBA retains an easing bias with the next move in rates likely down, Stevens highlighted Australian economic growth is still tied to Chinese growth.

“The Australian economy’s exposure to China has increased, as was understood then. So China’s prospects matter more. The current rate of growth of the Chinese economy is uncertain, as is its future growth rate.”

Source: RBA Chart Pack

As the data shows, there is a clear downward trend in Chinese activity indicators and Stevens said: “Chinese policymakers are attempting a profound transition in the growth model while dealing with some legacy issues (such as a substantial debt build-up) arising from the previous model.”

That will be no mean feat. No wonder the RBA is still concerned.

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