Australia managed to survive the global financial crisis with the help of a huge stimulus program from China.
Chinese demand for Australian minerals prevented our economy from tanking.
However, almost a decade later, doubts have arisen about the health of the Chinese economy.
“The last couple of data points have been weaker, but I think the real impact of that will only be seen in the next few quarters,” said Julian Evans-Pritchard, the China economist of Capital Economics.
“So we are quite wary of whether the current strength [of the] economy can be sustained for much longer.”
China’s GDP slows down
China’s official growth figures indicate its economy has slowed down — from around 8 per cent (in 2012), to its current level of just below 7 per cent.
However, Mr Evans-Pritchard believes China’s economy has actually been much more volatile during this period, and that the spike in growth it had in 2016 was due to a government stimulus program.
“The challenge is that improvement has been reliant on significant stimulus which is now being withdrawn, which creates concerns about the outlook going forward,” he said.
China’s debt load is currently around $33 trillion dollars, which has prompted ratings agency Moody’s to recently cut China’s debt rating for the first time since 1989.
“It’s unsustainable in terms of the total volume and the trajectory that it’s taken,” said Greg McKenna, chief market strategist at AxiTrader.
“And that’s why the government has been working really hard in the last 12 months to slow down the growth.”
Mr Evans-Pritchard said, “If China was a free market economy, it already would have had a financial crisis — given the build-up in the level of non-performing debt in the banking system.
“Honestly, China is not a fully functioning free market economy [as] the state still plays a significant role in backing up the financial system and bailing out the struggling firms.”
“And that’s why the game keeps going [and] the debt keeps building.”
The effect of Chinese money on Australian property prices
Although Chinese stimulus during the GFC protected Australia from a recession, Mr McKenna believes Chinese money has, in part, fuelled a property price boom in the eastern states.
Mr Evans-Pritchard, however, believes the situation could turn quickly.
He said, “There is a real risk that that demand will dry up quite quickly if the economy faces difficulties.
“In particular, because the [Chinese] regulators are going to be much more strict on capital outflows if the [Chinese] economy does face significant pressures.”
According to Dr Kathleen Walsh, a finance professor at ANU, China is worried about excessive capital leaving the country.
“It’s one thing for companies to go out as a way of expanding China’s business acumen and moving into other countries, and it’s different if it’s capital flight,” she said.
“I think they’re very aware of the symbolism of that flight.”
Mr Evans-Pritchard said, “It does want Chinese firms to have a greater presence overseas but there’s a lot of speculative investment going on — Chinese firms purchasing foreign football clubs [and] Chinese families buying overseas properties.”
China’s concerns about money coming in
Reserve Bank governor Philip Lowe also believes China is concerned about capital inflows.
“While many countries have liberalised their capital account and made their exchange rate more flexible, few — if any — have done so without causing at least some disruption to their domestic financial system,” he said.
Dr Walsh’s view is that China may experience a stock market crash if it takes in too much money from the outside that it is not prepared for.
Furthermore, Mr Evans-Pritchard believes if China’s economy falters, Australia’s economy will follow.
“The most obvious candidate for another global crisis at this stage is China itself.”
He also said that Australia’s exposure to the Chinese economy “may work against it this time”.
It now appears that Australia’s run of economic growth will significantly depend on what happens in the world’s second largest economy.
By Carrington Clarke