Before worrying about risks stemming from a slowdown in Chinese growth, Australia should focus on its own backyard.
That’s the view of ANZ economist Richard Yetsenga, who said that China is better placed to withstand the next downturn in its growth cycle.
In addition, he said policy makers need to think outside the square given the concerns about Australia’s economic growth.
Rather than sticking to growth projections which are starting to look optimistic, the government should get on the front foot and enact more aggressive fiscal reforms to boost the economy.
Yetsenga highlighted China’s services sector as a key driver of growth, which would help the economy withstand reduced industrial activity and the recent crackdown on credit growth.
He noted increased activity in the digital economy on his most recent visit, particular in major cities.
Citing e-commerce giants Tencent Holdings and Alibaba as the two largest companies in China by market capitalisation, Yetsenga said that there were an additional 102 internet companies valued at more than $US1 billion, according to China Money Networks.
“China’s e-commerce sector, in particular, now looks to have reached critical mass as a driver of growth,” he said.
In addition, Yetsenga said that there would be more stability in the Chinese industrial and housing sectors, and the Chinese currency – three areas that have historically been associated with higher volatility.
He cited ongoing efforts to reduce steel supply, which will reduce the likelihood of sharp drops caused by oversupply.
China’s steel inventories are now just 55% of the levels seen in 2012/13, and the size of China’s steel processing industry was reduced by 10% last year as blast furnaces were closed down.
On housing, Yetsenga said that construction peaked in 2011 and housing inventory is also declining steadily.
“The inventory to sales ratio is down to 2.3 years, from 3.1 years at the end of 2015, the lowest level since 2012. There are even reports around rising occupancy in some of the ‘ghost city’ hotspots like Tianjin, where office vacancy rates have been as high as 50 per cent,” he said.
Yetsenga also expects China’s currency to remain steady, without the shocks seen in prior years such as 2015 when policy makers intervened to devalue the currency.
He said stability in the currency will largely be driven by fundamentals, as China’s interest rates have been rising faster than US rates and its foreign exchange reserves have also risen since February.
Turning towards Australia, Yetsenga said there should be less concern about China and more focus on the domestic headwinds stifling economic growth.
“Higher GDP per capita (which should naturally bring down rates of growth), mortgage penetration which is very mature, a bank regulatory environment which effectively removes bank credit as a driver of growth (in exchange for structural benefits to be sure) and slower population growth all imply the future will be harder work than the past in Australia,” he said.
Yetsenga said that in light of the current conditions, aggressive reform would be required to create any significant growth momentum.
In other words, policy makers can’t simply wait for the economy to turn and then choose the appropriate fiscal and monetary policy response.
“Until the policy debate accepts a more ambitious reform program is virtually the only approach which can take the economy forward, particularly a program which is focused on removing blockages rather than creating them, Australia will struggle to get closer to the carrot of growth which constantly and tantalisingly seems to remain just out of reach,” he said.