RBA governor Glenn Stevens just said he's not sure how China's economic transition will play out

Reserve Bank of Australia governor Glenn Stevens. Picture: Bloomberg

RBA governor Glenn Stevens’ did an end-of-year interview with the AFR this morning.

In the interview, Stevens discusses a wide range of topics but one of the most interesting and important is what he has to say about what is happening in the Chinese economy, what he thinks about the market’s reaction to the slowdown and his admission that he’s not sure how the Chinese economic transition will play out.

Stevens said growth in 2015 was probably slower than China wanted and as result “macro economic policies are generally moving in the easing direction”.

But longer term he said:

There’s no question, I think, that the average rate of growth in China in the future is going to be considerably lower than what we have become used to. But they’ve been telling us that for three or four years – that that was in train, inevitable and actually desirable.

The fact China’s slower growth is “newsworthy” and causes so many people heartburn surprises Stevens. The Chinese signalled it themselves, he said, and “no one grows as fast as they were indefinitely”.

That’s worth remembering next time you’re caught at a barbecue with someone saying we’ll all be ruined if China slows. China’s annual GDP is more than US$10 trillion. So even a 6% annual growth rate is still US$600 billion in additional economic activity each year.

At the current exchange rate of 72 cents, that growth rate is equivalent to a little more than $800 billion in Aussie dollar terms. That’s roughly 50% of Australia’s total GDP that China will add as its growth slows in the year ahead.

So it’s no surprise that his often understated style, Stevens said the result of China’s slowdown means it will “continue to be interesting”, adding Australians will continue to fret about its biggest trading partner’s prospects. But, he said, “there are probably worse problems to have”.

On how the economic transition eventually play out though, Stevens was a little less sure.

Stevens said the Chinese recognise the world can’t absorb their exports because they are simply “too big now” and as a result they are transitioning toward “more domestic demand, more consumption and so on”.

But he’s not sure how it will all play out. Stevens said the shift back toward domestic consumption is a “transition they have to make” but added:

It’s a pretty big challenge for a country of this size with this history, and, you know, inevitably we can’t be sure how all that will work out. But there’s nothing you can do about that, other than adapt to what comes.

Adapt. That’s what the Australian economy and the RBA does best.

You can read the full interview here.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.