If you listen to the some of the commentary in Australia and overseas, China is now something of a threat to Australia’s well being, especially with the lower target growth rate of 7.5%.
As well, many analysts claim the still weakening level of home prices in China presents a problem to the country’s banks and economic well being, oblivious to the fact that the government has cleaned up a string of bad debts twice in the past two decades, and will do so again, if has to..
But, somehow many analysts think that the lowered growth target and the push by the Chinese government to boost domestic consumption could be a big problem for commodity producing countries like Australia.
That’s far from the truth, if anything the slowing growing rate will narrow the competition to countries like Australia and Canada from new supply sources for iron ore and coal in coming years because the new areas won’t be economic.
But whatever the case, China is certainly a major force in Australia, absorbing $US59 billion or 23% of exports last year.
That was close to the rest of East Asia (minus China and Japan), which took $US61 billion of our exports.
Despite the concerns offshore about China, Reserve Bank Governor, Glenn Stevens, doesn’t seem too worried by China.
He told an investment conference in Hong Kong yesterday
"The slowdown in Chinese growth – from 10 per cent to a mere 8 per cent! – is a major talking point and some see it as portending a major crash.
"But some slowing was required to reduce inflation and, therefore, put growth on a more sustainable path.
"One can certainly think of ways in which China could have a ‘hard landing’ at some point.
"It is very difficult for anyone to know (doubly difficult, I think, if trying to know while sitting in a trading room in New York or London).
"But if the Chinese economy does slow ‘too much’, one could expect that the Chinese authorities will have both the will and the capacity to respond, the more so now that inflation has moderated.
"China will have cycles like other economies, but it seems likely that the Chinese economy will grow pretty strongly on average for a while yet. It will be a very large economy.
"Even at the new growth target of 7½ per cent, a lower target than in the past five years (all of which were, of course, exceeded), Chinese GDP will equal that of the United States, in Purchasing Power Parity terms, in about a decade. It will exceed that of the euro area within the next few years," Mr Stevens said.
Very few of these doomsayers and handwringers have stopped to think about what sheer size of the Chinese economy and how little the lowered growth rate will impact that economy.
Did you know that a 7.5% growth rate this year in China (it won’t, it will be around 8.5%), will add more than $US520 billion in extra value, based on GDP of $US7 billion in 2011?
At an 8.5% growth rate the impact is close to $US600 billion (or more than 40% of the Australian economy this year!).
Back in 2010, when the economy grew by 10.4%, the growth rate was roughly the same as growth this year at 8.5%.
In other words, China is slowing, but the absolute size of the economy and the still high levels of growth, mean the economy will want as much, if not more iron ore, coal and a host of other commodities this year, in 2913 and for some years to come.
Mr Stevens understands that, but wonders why Australians in particular, are having trouble seeing the strengths of their economy.
He told his audience in Hong Kong there are differing views of the Australian economy: from inside the country and from offshore.
"At the moment, the viewpoints of those inside Australia differ somewhat from those of people outside Australia.
"Viewed from abroad, judging by what people say, observers see an economy that experienced only a relatively mild downturn in 2008–2009, that made up the decline in output within a few months, and that has continued to expand, albeit at only moderate pace, since then.
"They see an economy that has not experienced a significant recession for 20 years, that has strong banks and little government debt – and that debt remains AAA-rated.
"Some observers worry about high levels of housing prices and household debt.
"This is understandable given the problems that have occurred in some other countries.
"But then others point out that the arrears rate on mortgages, at 60 basis points, is quite low, and that the rate of new construction of dwellings in recent years has been low relative to population needs.
"Foreign investors see a country that remains quite open to them, and that, reflecting its economic circumstances, offers rates of return that are high by international standards, even though they are low by Australian historical standards.
"They understand the potential returns on the mineral and energy wealth stored in or around the Australian continent, and that our terms of trade have over the past year been higher than at any time for more than a century.
"There has been increased appetite for Australian dollar denominated assets, particularly sovereign debt, and the Australian dollar has risen strongly, to be at its highest level in three decades.
"Those at home see this as well. As consumers, they have responded to
