One of the least understood economies, there are many misnomers when it comes to China. Much of the rhetoric we read and hear is preoccupied with its economy slowing, or in the more extreme cases, expectations of a hard landing. This isn’t necessarily new -- concerns have been held for the better part of a decade, although they’ve only really become a part of the popular narrative since the GFC.
It can’t be said, however, that this is a particularly accurate view, even dismissing the more extreme concerns over a property crash or a burst credit bubble. The risk of either occurring is very low -- concerns are wildly overstated. That’s true even though at first blush, it would seem that economic growth has slowed -- to its lowest rate since 2009.
Part of the problem lies in the interpretation. How do we decipher that slowing exactly? It’s one thing to observe the real economic growth rate declining to 7.3 per cent (over the year to the September quarter of 2014) from whatever percentage years earlier -- 11 per cent or 12 per cent. It’s quite another to then weave into that tales of woe and despair.
These aren’t binary outcomes we’re talking about here after all -- where analysts can blithely state: ‘Double digit good, single digit bad’. It’s not that easy, especially for an economy where trends hold less analytical relevance. Too many changes are underway.
For a start, 7.3 per cent is still an incredibly strong growth rate. Yet to hear the market talk, you’d think that China’s economy had stalled -- an event that taps into to one of our greatest national fears. Existence without a clearly identified benefactor. Where will the nation derive its growth? How will we address the budget crisis, the slump in the terms of trade and our falling national income?
Perspective is important. Seen from an Australian viewpoint, the above growth rate doesn’t quite capture the mounting importance of China to the world economy. That is, in terms of its wealth, its size and its ability to act as an engine of growth elsewhere throughout the world -- and of particular importance, in Australia.
Indeed, seen on that basis it could hardly be said that the Chinese economy is even slowing. Consider that in 2014 the Chinese economy is expected to show the largest expansion on record; GDP set to rise by nearly $1.5 trillion (on a PPP basis) after a $1.37 trillion lift last year. For comparison, this is 22 per cent above what we saw during the ‘mining boom’, in dollar terms, and about 40 per cent above what we saw in the few years prior to the GFC -- a time when China’s economy grew on average by $955bn per annum. This highlights an important point -- China’s relative importance to global growth is much higher now than it was pre-GFC. Thirty cents of each and every dollar that the world produces comes from China now. That compares to an average of 18 cents pre-GFC -- when the Chinese economy had growth rates as high as 12.4 per cent! Which matters more?
Everything is relative. Even growth is relative and viewed through this prism, the Chinese economy is far from slowing. On more meaningful measures to Australia, China’s economy is accelerating -- growing. Back in 2007, China’s economy was only 9 or 10 times the size of Australia’s. In 2014 it’s now 16 times the size -- up from 15 times last year.
Now none of this changes the fact that commodity prices are off -- bringing all the troubles we hear so much about. It can’t be said however, that any of this is due to China, because to all intents and purposes the Chinese economy is not slowing.
All that said and done, none of this will change the popular narrative in the short term -- it’s far too entrenched. Yet it does highlight how the fundamental forces at play over recent years haven’t actually changed -- if anything they’ve intensified. For those with a medium-term view, the pendulum will swing, the narrative will revert.