Just a few months ago China (and Australia) was more worried about excessive growth in the economy and the spectre of rising inflation than recession. Steps were even taken to cool the real estate market. Now as the world economy heads towards recession, China faces the unwelcome prospect of the previously unthinkable - an economy that is slowing down.
Most commentators had assumed that China - like Australia - might escape the full impact of the world financial meltdown. For Australian business and exporters there was optimism that China - and the other emerging economies of Asia - would have enough growth to ride out the storm. The situation appears to have changed and ANZ in its 2008 December Outlook suggests: "Buckle up - we’re in for a rough ride."
Our advice for clients doing business related to China is to stay in the saddle; like those robins, the upturn will come and by then many will have missed it, or not be in a position to benefit. Competitors all around the world may be reassessing their presence or future in China, but as the word ‘crisis’ in Chinese suggests, for those more astute perhaps the opportunity is a good one and enhanced by the circumstances.
How much is the world economic meltdown affecting China?
A lot, says Dr Shan Ma of Queensland University of Technology’s International School of Business: "China’s economy depends heavily on exports, thus the slowing down of the world economy will affect the Chinese economy in the short run. The increased cost of material and labour and the appreciation of Chinese Renminbi, had put great pressure on Chinese manufacturing, and many SMEs have been closed down recently and many foreign firms have pulled out of China and moved to other low cost countries. The weaker demand for Chinese goods - along with the world economic recession - will certainly make this even worse."
In an attempt to stimulate the economy China’s State Council announced on 9 November that it will pump around the equivalent of one trillion Aussie dollars into the domestic economy over the next two years, a further sign the world economic crisis is having a major impact on China. The huge stimulus package announced by Premier Wen Jiabao will target major infrastructure, environment and social welfare projects and earthquake ravaged Sichuan Province. The initiative has been widely welcomed by commentators - including Prime Minister Kevin Rudd - and it had an immediate short term positive impact on Asian markets.
The decision to inject the huge state funding stimulus followed the release of China’s slower than expected GDP growth of 9% for the third quarter of 2008 - the first sub 10% figure for five years. Analysts predict the annual figure for 2008 could go lower. ANZ bank’s December 2008 economic outlook forecasts China’s economy to grow by 9.7 percent in 2009, 8 percent in 2010 and 8.9 percent in 2011.
What will a slowing Chinese economy mean for Australia - and in particular what impact will it have on anyone doing business with China?
Ultimately this depends on the extent and the duration of any slowdown. Australia’s greatly increased reliance on China as a market for our goods and services suggests that a negative flow-on of some degree for Australian business is inevitable. But, if you wanted to have anyone in your corner in such times, you’d probably want it to be China, wouldn’t you.
The last decade has seen a rapid expansion in trade and investment ties between China and Australia. This increased reliance now equates to increased exposure. China is our largest trading partner - and second largest export market. The numbers of Chinese students and tourists have been growing rapidly. And China’s appetite for raw materials has seen PRC investment in Australian resources and minerals increase. Commodities have been the big ticket exports, but there have been Australian inroads in other sectors, including architecture, financial services, construction and infrastructure, a swag of sports related projects during the Olympics and sophisticated environmental, software and consumer products.
All these success stories have relied on continued rapid growth and strong domestic demand in China. Signs that China’s domestic economy and consumer demand are easing have been in evidence for some months.
Australian iron ore and coal miners have already seen falls of up to 40 percent in the spot price for their product and several have made urgent trips to China to talk to their clients about future orders. Chinese steel makers are feeling the pinch from reduced domestic demand for autos, new construction and housing - and greatly reduced demands for Chinese exports, as major buyers like the United States and Europe go into recession. Put simply, a slowing Chinese economy will not need as much coal, iron ore, or other raw materials. One exception so far has been natural gas. Woodside has reported in the media that there has been no slowdown in demand - or prices - from China for LNG.
A continued Chinese slowdown could reduce demand for products and services across the board, as Chinese business and consumers tighten their belts. The international media has reported closures of factories in Southern China and layoffs of workers, the real estate sector is down, new construction projects have declined, sales of cars are down and air travel is also down. Everything points to a slowdown in the Chinese economy.
Anyone selling into the Chinese market, or targeting Chinese consumers will need to be prepared for lower than forecast demand, and downward pressure on prices being offered. It may also mean fewer people taking international travel, or parents rethinking the financial burden of educating their children overseas.
Look from the Yin to the Yang
If there is a bright spot on the horizon, it comes in the shape of a falling Australian dollar.
Just a few months ago the Australian and US dollars had almost reached parity - now the Australian dollar has plunged by as much as a third against the greenback. Although analysts say volatility will continue, it seems certain the Australian dollar will remain comparatively weak. Since Australian exports are priced in $USD it makes our exports to China cheaper and - hopefully - more competitive.
"The weaker $AUD will compensate to some extent the effect of weaker demand for resources by the Chinese economy. At the same time the education and tourism sectors will benefit greatly from the weaker $AUD," says Dr Shan Ma of QUT.
Another positive is the determination of the Chinese government to ensure that its domestic economy stays in good shape. More factory closures and job lossesl - let alone major losses in the stock and real estate markets - are developments the government wants to avoid.
Australia’s Treasurer Wayne Swan summed up the generally positive view of the Chinese economy on ABC radio on 10 November: "China is still relatively strong. It is certainly slowing, but it has the capacity, if you like, to strengthen its own economy and that’s good news for the Australian economy."
The State Council’s massive stimulus package shows the Chinese government is prepared to act decisively to keep the economy moving.
However Dr Ma says although the government can initiate spending measures, he warns it will be very hard to convince ordinary Chinese consumers to spend in order to help spur growth. Dr Ma says people will follow the traditional adage of saving in hard times - and they may have already have suffered losses in the stock and real estate markets.
But so far Chinese consumers seem to be ignoring the warnings. In October China recorded strong domestic demand, with retail sales growing by 22 percent. So, the bottom line is no one really knows what lies ahead, and yes, tighten your seatbelt, but don’t get off just yet!
* Warren Buffett, 17 October 2007, New York Times
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