Chinese reforms 'will cause a recession' - but there's good news
But the long-term impact of the reforms will be positive, for China and the world, says Yiping Huang, professor of economics at Peking University. Its economy needs to be liberalised, and to delay another five years would put China "in deep trouble".
Professor Huang told the Australian National University's annual "China Update" that the details of "Likonomics" have yet to be spelt out. But its key planks will be to end major stimulus to the economy - unless things go wrong - force local governments and state-owned enterprises to reduce debt, and unleash wide-ranging structural reforms.
These reforms will impact on the world, he said. China will become a major consumer of other countries' production, shed low-level manufacturing and move into more sophisticated goods - and become a source of global inflation.
Speakers told the forum that China's declining workforce means its future growth rate will be lower than the target of 7.5 per cent set by former premier Wen Jiabao. The head of Treasury's China unit, Owen Freestone, said its baseline forecasts assume growth would fall to 4.5 per cent by 2020, much lower than India's and Indonesia's.
Others were more upbeat. But Dr Lu Yang, of the Chinese Academy of Social Sciences, said the workforce would decline by 30 million by 2020, cutting the sustainable growth rate to 5.5 per cent.
Professor Ross Garnaut said rising wages would force business to focus on raising productivity, and Professor Huang said financial deregulation would see banks redirect lending from state-owned enterprises to more productive private firms.
Trade Minister Richard Marles said China's transformation would be positive for Australia. "It offers enormous markets for all goods and services that Australia has to offer", he said.
Fears of Chinese investment taking over the world were also debunked. Professor Karl Sauvant, of Columbia University, said China's foreign direct investment last year was just $US84 billion out of a global total of $US1.2 trillion, and it owned just 3 per cent of the stock of foreign-owned firms.
Frequently Asked Questions about this Article…
Likonomics refers to the set of reforms China is pursuing to liberalise its economy — ending major stimulus (unless needed), forcing local governments and state-owned enterprises (SOEs) to reduce debt, and implementing wide-ranging structural and financial reforms. According to economists cited in the article, these changes are likely to slow China’s short-term growth and cause pain for SOEs, but are intended to improve long-term economic health.
Some experts in the article warned the reforms could trigger short-term pain and even contribute to a future global recession, because a significant slowdown in China would have broad effects on trade and commodity demand. However, other speakers emphasised the long-term benefits of reform, so the timing and global scale of any recession are debated.
The article notes that as China shifts from low-level manufacturing to consuming more imported and sophisticated goods, it could become a source of global inflation. Increased Chinese demand for foreign production and higher wages at home are cited as factors that could put upward pressure on global prices.
Speakers at the forum highlighted that China’s shrinking workforce will likely reduce its sustainable growth rate. Estimates in the article ranged from growth falling to about 4.5% by 2020 (Treasury baseline) to a sustainable rate around 5.5% if the workforce drops as projected. For investors, that implies lower structural growth in China compared with past decades.
The reforms are expected to hurt heavily indebted SOEs by forcing debt reduction. Financial deregulation is likely to redirect bank lending away from state-owned enterprises and toward more productive private firms, which could change where credit growth and business opportunities occur in China.
Trade officials quoted in the article said China’s transformation offers “enormous markets” for goods and services that Australia supplies. As China becomes more of a consumer of foreign production and moves into higher‑value goods and services, Australian exporters of commodities, services and higher‑end products could see increased demand.
The article reports that fears of a Chinese takeover were overstated: last year China’s outward foreign direct investment was about US$84 billion out of a global total of US$1.2 trillion, and Chinese ownership made up only about 3% of the stock of foreign‑owned firms. That suggests Chinese outbound investment, while growing, has not dominated global investment stocks.
Based on the article’s points, everyday investors might monitor exposures to Chinese growth risks and consider the structural winners and losers: companies tied to low‑level manufacturing could face headwinds, while exporters of sophisticated goods and firms benefiting from rising Chinese consumption or private‑sector credit could gain. Also be mindful of potential inflationary pressures from China that could affect global bonds, commodities and consumer prices. (This is general information, not personalised financial advice.)
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