The AMP’s Dr Shane Oliver says China’s economy is recovering off the back of a combination of fiscal and monetary stimulus and signs the export slump is easing. It is on track for 8% GDP growth this year.
Unlike developed countries which face structural constraints on growth, China’s low per capita consumption, low household debt levels, rapid urbanisation, low public debt and relatively sound banking system are structural tailwinds for growth going forward.
While a quick return to 11% plus growth on a sustained basis is unlikely in the absence of much stronger export demand, strong consumer spending is likely to underpin medium term growth in China of around 9 to 10%.
Chinese shares have had strong gains from their lows but are still well down from their 2007 highs and offer good long term value.
He says Australia will be a beneficiary of the domestic demand-driven recovery in China now underway.
One key beneficiary in this regard is the Australian dollar which supported by stronger global economic data and commodity prices along with signs that Australian interest rates will remain well above global interest rates has now clearly broken above its post global financial crisis range of $US0.60 to $US0.7250.
Dr Oliver says a rise in the value of the $A to $US0.80-85 by year end on the back of stronger commodity prices and relative high local interest rates is now looking likely.
Here’s his latest assessment of China
After slowing sharply late last year – highlighted by a slump in GDP growth from a peak of near 13% in 2007 to just 6.1% over the year to the March quarter – a range of indicators are pointing to a recovery in China.
While there has been much talk of the ’green shoots‘ of recovery globally these have been much stronger and more broad based in China.
In fact, talk of a hard landing (defined as 6% or less annual growth in China) is now giving way to confidence that GDP growth this year will be around the 8% level.
Talk of a recovery in China has been met with disbelief by many; the most common concern is that Chinese growth is dependent on the US consumer and if it remains weak then so too will China.
Is China’s recovery is the real thing and if so, what it means for commodity prices and Australia?
The Chinese economic cycle is turning up again
During the December quarter last year the focus of Chinese policy makers swung aggressively towards boosting their economy in the face of the sharp downturn then underway.
A massive fiscal stimulus package focused on infrastructure spending was announced, monetary conditions were eased aggressively, various industry support plans were released, the gradual appreciation of the Renminbi came to an end and policies to promote consumption were stepped up.
The evidence clearly suggests that this is bearing fruit:
- Money supply and loan growth has surged higher;
- Fixed asset investment has picked up to a 30% year- on-year pace from a low around 22% in December;
- Industrial production is growing again;
- Real retail sales growth has remained strong;
Surveys of business conditions in both manufacturing & services sectors have improved for 5 months in a row;
- Property sales are rising;
- The downswing in Chinese exports appears to be abating, reflecting the stabilisation in global conditions.
The broad based nature of the pick up in China suggests it is more than just a bounce associated with the end of the inventory de-stocking cycle.
The improvement in manufacturing conditions points to a reacceleration in GDP growth this year.
These considerations suggest a recovery is in progress and growth is back on track to be around 8% this year.
But is it for real?
While there will no doubt be setbacks along the way there are good reasons to believe that the rebound we are now seeing in China is sustainable.
Firstly, consumer spending in China has a huge potential for strong growth going forward.
Unlike in countries such as the US and Australia where consumption accounts for around 60 to 70% of GDP in China it has fallen to less than 50%.
So there is significant potential to push it back up.
Several considerations are worth noting in this regard:
Despite common perceptions, Chinese consumption has actually been growing very strongly.
It’s just that business investment and net exports have been growing faster.
This reflected a combination of factors including economic policies designed to boost investment and exports, which were partly motivated by a desire to ensure China did not become vulnerable to a withdrawal of foreign capital as occurred in the Asian crisis. There are also strong levels of household savings as the social safety net was wound back last decade.
The Chinese Government has now shifted to promoting more balanced growth with much greater emphasis on consumer spending.
With the global crisis highlighting the downside of being too reliant on exports, this adjustment has been stepped up and includes an emphasis on boosting consumption.
Policies designed to reduce household savings include measures to
