China’s apparent property collapse has the usual suspects talking about another hard landing again -- for what must be the 10th consecutive year. Noting how frequently these calls are made, and noting how frequently those who make these calls are wrong, my own view is that I don’t think we have anything to worry about. That is, there isn’t a great risk of China falling into a recession at this point. Even if there was it probably would not even matter that much for Australia apart from a short-lived market panic attack.
Now I realise this isn’t the common wisdom, but then again, common wisdom isn’t all that wise most of the time. Especially when sprouted by economists or policymakers. According to that view it would matter a lot. We might even have that much called for and long-awaited -- with much relish -- recession. China is a $10 trillion economy after all and set to become the world’s largest over the next 10 years or so.
That’s not to say it wouldn’t matter at all. We might have some temporary confidence shock and our stocks and currency would sell off. I don’t think that impact would be sustained however, and looking through the noise, I think Australia would get along just fine.
Firstly, China is big -- but it is not the be-all and end-all. This is hype. To see this, consider that while China is our largest export market -- taking about 30 per cent of our goods exports, they’re really only our largest market for iron ore, copper and gold. For our other large bulk export, coal, Japan ranks ahead of China, and even then, exports to China are roughly comparable with exports of coal to India (coking) and South Korea (thermal).
Most importantly, for our soon-to-be booming energy exports, China is a minor player compared to Japan, and perhaps even South Korea going forward. Other than that, our financial markets aren’t especially intertwined, and we rely more on the US, UK and Japan for the bulk of our investment and capital needs. That is, a Chinese recession isn’t going to cause a credit crunch.
Now consider what an actual Chinese recession would look like. It is not going to be like what we see here or in the US. They’re not going to get negative growth anytime soon especially as the government’s balance sheet is pristine and policymakers have ample capacity to use their monetary levers.
Think back to the GFC in 2009 -- China was widely regarded as being in a recession with a growth rate of 6 per cent! And that was with a global credit crunch. Now, I don’t think we would ever get there, other than by policy design, but if we did, and from Australia’s perspective, that’s still strong growth and unlikely to affect our export position too much.
All through that last recession, exports of iron ore from Australia to China, continued largely unabated, down only 1 per cent for that year, and that was during a global credit crunch, when global trade froze.
In any case, in the ensuing year, ore export volumes surged 16 per cent. That’s still exceptionally strong growth over a two-year period during a global credit and trade crunch. Needless to say, a localised Chinese recession now wouldn’t be anywhere near as dramatic. So since that time, average annual growth in iron ore volumes to China has been something like 11 per cent. A recession now might see that slow to between 7 and 9 per cent or something -- that’s hardly a disaster.
Another way to think about things is with reference to the Japanese experience. Up until recently, Japan was our largest export market. Now over most of that time, Japanese growth has been extremely weak, lucky to average 1 per cent per annum. The lost decades remember? Indeed over the past five or six years, Japan has barely grown at all -- we’re talking a decimal point here, not much above zero. At the same time, Australian exports to Japan have averaged growth of about 8 per cent (4 per cent volumes) per annum -- and that includes the GFC.
Japan’s lost decade hasn’t really been a big event for Australia. We still export a lot of stuff to them, and the chances are they’ll be our biggest export market again once liquid natural gas exports fire up. This from a country that’s stagnant. How would a recession in China, a country three times the size of Japan’s, with a ‘recessionary’ growth rate of 6 per cent or so, then be harmful to Australia? It clearly wouldn’t. With that in mind, it’s not so much the case if China sneezed would Australia catch a cold. It’s more the case that if China sneezed would we even notice?