China’s economy has been at the forefront of investor minds this year. The slowdown in the world’s second largest economy rattled financial markets, saw the US Federal Reserve hold off lifting rates and contributed to sharp declines in commodity prices. Recent developments, at a time when the global economy is already weak, are causing angst for many.
However, should China’s slowdown really be of a concern, particularly considering annual growth rates of near 10% in the years following the global financial crisis were never going to be sustainable?
While some will disagree, Paul Bloxham, chief Australia and New Zealand economist at HSBC, isn’t concerned by the recent ructions. Instead of fretting, he sees a raft of opportunities opening up due to the economic transition taking place in China. As he points out, while annual growth now sits at 6.9%, the economy is far larger than in prior years.
China’s growth is expected to have slowed to around 7% in 2015 from 10.6% in 2010. But because China is a lot larger than it was in 2010 (89% larger in USD terms and 69% larger in local currency terms), the IMF estimates that this year’s GDP growth is estimated to be equivalent to $1,028 billion, which is slightly more than the addition to GDP in 2010 of $980 billion.
By adding around an expected $1 trillion worth of GDP to its economy in 2015, China is set to add six New Zealand economies or four-fifths of Australia’s economy in that one year. As Chart 1 shows, China has been adding around $1 trillion worth of GDP to its economy on average every year since 2008.
That’s some serious of growth. Essentially the economy has nearly doubled in size in just five years.
And while the nation’s industrial sector – responsible for most investor angst this year – is languishing, weighed down by overcapacity, weak demand and high real interest rates, it is no longer the largest sector in the Chinese economy. As the chart below reveals, services replaced secondary industries back in 2012.
Services now account for 51% of the Chinese economy, easily dwarfing secondary industries at 43%. While that’s bad news for mining firms who supply the raw ingredients, it’s not all bad for Australia, which benefited significantly from China’s infrastructure investment binge between 2009 to 2013.
Now that China’s services industries are powering growth, it’s going to open up a raft of opportunities to Australia’s non-mining sectors. Bloxham outlines below why China’s economic transition will benefit Australia in the decades ahead.
As China’s economy shifts its growth from being investment-led to being consumer-driven, Australia’s next growth opportunities are expected to increasingly come for the services sectors.
China is already Australia’s largest market for its services exports, at around 14% of services exports in 2014 ($A8 billion). We see opportunities for the tourism, education export, agriculture, health, business and financial services industries.
Here are three charts from Bloxham’s extensive research note that bolster the bullish case for Australian services industries. The first shows Chinese outbound tourism growth from 1994, comparing the the current trend in growth to that of Japan and South Korea, two nations that transitioned from developing to developed nations.
And here’s Chinese student enrolments in Australia. They hit a record high of 147,000 in the first half of 2015, accounting for close to 30% of all international student enrolments. A weaker Australian dollar, China’s growing middle class and the need for higher workforce skills, means the outlook for enrolment numbers is skewed to the upside.
Finally, as China’s population ages, healthcare spending is also likely to increase rapidly. The World Health Organisation estimated that Chinese spending on health rose from $123 billion to $511 billion between 2006 and 2013. By 2050, the number over the age of 65 is expected to increase to 369 million, larger than the US population today.
Given the sheer size of the numbers, and the likelihood that Chinese household wealth will grow rapidly in the coming decades too, there are plenty of opportunities. While other nations will doubtless compete to supply the services, Australia’s geographic location puts it in a stronger position that most.
There’s work to be done and it can’t be taken for granted that the Chinese will simply chose Australian services, but if business, in consultation with the government, plays its cards right, the future looks bright, not bleak, for the decades ahead.
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