Christopher Kent: Slowdown in China's growth - implications for
Australia
Remarks by Mr Christopher Kent, Assistant Governor (Economic) of the Reserve Bank of
Australia, at the UBS Australasia Conference 2015, Sydney, 17 November 2015.
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I thank Ivan Roberts for help in preparing these remarks.
I would like to thank UBS for the opportunity to participate in this conference.
Given its importance to the Australian economy, the Bank monitors developments in China
closely with a team of economists in both Sydney and Beijing.
The easing in the growth of the Chinese economy over the past year or so has two related
parts. The economy is slowing as it matures, and this is to be expected. Overlaying that, there
has been a substantial slowing in the industrial sector, linked in part to earlier excesses in
construction. How all of this will play out and the effects on the Australian economy are
uncertain. I'll briefly highlight some possibilities. Let me be clear though, many of these have
positive implications for our economy.
It is natural for the speed of China's economic development to ease and for its nature to evolve:
• Part of this reflects slower growth of the working-age population, which is now in
decline. Other than increasing the retirement age, there is little that can be done to
alter that in the coming years, notwithstanding the ending of the one-child policy.
• However, growth continues to be supported by the process of urbanisation, which
uses commodities intensively. This has further to run, albeit at a more gradual pace.
• Productivity growth appears to be slowing as windfall gains from earlier reforms have
waned. But there remains a large gap between productivity in China and in advanced
economies. That gap could be closed more quickly via additional reforms to allow a
greater role for market forces in allocating productive resources. The authorities have
expressed support for such reforms.
• The authorities would also like to see growth rebalancing from investment towards
consumption. That is happening gradually. It is also being accompanied by a rise in
the share of activity accounted for by the services sector as the economy develops
and household incomes rise.
While these longer-run changes imply a decline in the growth rates of investment and industrial
production, both have also experienced a noticeable cyclical slowing over the past year or
more. As earlier excesses in residential construction gave rise to a large stock of unsold
housing, house prices declined and so too did housing construction. Sales and prices have
recovered a bit since the start of this year, but there is little sign to date of a sustained
improvement in construction activity.
Weakness in construction has been accompanied by declines in output of a range of
manufactured products over the past year.1 Steel is one obvious example. Mining activity in
China has also been affected. Indeed, a further decline in the output of unprofitable Chinese
mines would provide some support to commodity prices, and would benefit other producers,
including in Australia.
Although the weakness in China's property and manufacturing sectors is clearly of concern to
commodity exporters like Australia, there are a number of countervailing forces supporting
broader activity in China.
• First, growth in the services sector has been resilient, and should continue to be
assisted by a shift in demand toward services as incomes rise.
• Second, growth in household consumption has also been stable in recent quarters
aided by the growth of new jobs.2 Of course, such outcomes cannot be taken for
granted; if the industrial weakness is sustained, it might eventually affect household
incomes and spending.
Third, Chinese policymakers have responded to lower growth by easing monetary
•
policy and approving additional infrastructure investment projects. They have scope
to provide further support if needed, although they may be reticent to do too much if
that compromises longer-term goals, such as placing the financial system on a more
sustainable footing.
There are two key implications of the slowing in China's growth for Australia.
First, the substantial slowing in industrial production has contributed to a further decline in
commodity prices over the course of this year. (This is in addition to the contribution from the
substantial increase in the supply of commodities, including from Australia.) We've detailed the
effect of the decline in commodity prices on Australia's economy elsewhere.3 I would just add
that commodity prices remain relatively high. The Bank's index of commodity prices has fallen
by about 50 per cent from its peak, but is still almost 80 per cent above early 2000 levels.
Clearly, conditions in the industrial sector in China, and Asia more broadly, will have an
important influence on the path of commodity prices over the near term. Beyond that, the
changing nature of China's development implies that the potential for commodity prices to rise
from here is somewhat limited.
Second, the shift in demand towards services and agricultural products within China and the
Asian region more broadly presents new opportunities for Australian exporters. While our
comparative advantages in service industries are perhaps less obvious than they are for
mineral resources, the rise in the demand for services from a large and increasingly wealthier
populace in our region will no doubt be to our benefit.