China: causes for concern & optimism

In Prime Minister Tony Abbott’s efforts to secure a free trade agreement with China ...

In Prime Minister Tony Abbott’s efforts to secure a free trade agreement with China – following successfully negotiating such agreements with Korea and Japan, he told Korean reporters this week, "What I'll be wanting to reassure the Chinese government, is that we are genuinely open for business".

When it comes to China, we certainly are open for business. China is by far Australia’s largest trading partner and its economic health is of major importance to us. Its voracious appetite for our mining output has been vital to the Australian economy for years.

There have been many concerns raised about China on the economic front including a potential housing bubble, its slowing growth rate and increasing debt levels.

But how problematic are these for our economy and Australian investors? Head of investment strategy and chief economist at AMP Capital Investors, Dr Shane Oliver, is generally sanguine about them.

He notes that while China has its largely uninhabited ‘ghost cities’ where excessive development has occurred, the real issue is an undersupply of affordable housing. Of properties being purchased, average deposits are around 40% of values, 20% of buyers pay in cash and 90% of new home buyers are owner occupiers. Over the period 2006-13 household income rose 12%pa on average, and house prices rose 9%, “which is hardly the stuff of bubbles”, Oliver said.

On debt and ‘shadow banking’ (credit growth outside the regulated banking system), despite reports to the contrary, Oliver said both are at quite low levels compared to the rest of the world. ”The Chinese have a very high savings rate and they’re recycling that savings through their banking system. It’s not as if China’s borrowing from the rest of the world. Overall, debt seems to be an issue the authorities have under control. They have certainly indicated they want to slow it down. I don’t think it’s a factor causing Chinese growth to collapse”.

Chinese growth has in fact slowed in recent years to around 7-7.5%, but Oliver sees stability at this level, with no sign of a boom or a bust. Overall, Oliver says, “China faces various risks, but these look to be manageable. While a return to the China-driven boom of last decade looks unlikely, Chinese growth around 7.5% should still provide reasonable support to global growth and provide a reasonable backdrop for Australian resources shares”

For Australian share investors interested in diversifying internationally into this monumental economy, a bonus is that the Chinese share market is presently “one of the cheapest share markets globally, suggesting good returns in the years ahead as Chinese growth remains solid”.

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