socalled “ zombie firms ” – enterprises that are making losses but still attracting financial resources. 6 in many cases, these are local government soes with substantial social welfare obligations, which leads to understandable resistance to closure. the “ supply - side ” reform initiative announced by central government authorities late last year has set goals for the closure of excess capacity in coal and steel over the next few years. graph 7 the working - age population for urban centres has not yet peaked ( given ongoing urbanisation ), although its growth rate is gradually declining. also, earlier rapid growth in housing demand was partly a response to unmet demand for private housing that had built up under the old state - dominated housing system. this source of growth was always going to wane, as the backlog has been progressively satisfied. the term has been used publicly by the premier, li keqiang, to describe such firms. for example, see : keqiang l ( 2016 ), report on the work of the government ’ available at < http : / / english. gov. cn / premier / news / 2016 / 03 / 17 / content _ 281475309417987. htm >, delivered at the fourth session of the 12th national people ’ s congress of the people ’ s republic of china, 5 march. bis central bankers ’ speeches evidence of poor returns in manufacturing is mirrored in declining returns to investment for the chinese economy overall. rough estimates suggest that the return on capital in china has fallen relative to the average cost of finance, largely reflecting a rapid increase in the capital - output ratio since the late 2000s ( graph 8 ). 7 graph 8 prospects for rebalancing in contrast to the weakness in profits, the share of income going to labour now appears to be rising, reversing the decline seen over the past decade. 8 accordingly, it is reasonable to expect that, over time, the composition of demand will tilt towards consumption and away from investment. indeed, there are tentative signs that this ‘ rebalancing ’ may have started in the past few years. however, chinese consumption growth is already very strong and, historically, it has been rare for economies to experience stable and strong consumption growth during such a rebalancing. in china, as in many economies, investment tends to create sizeable demand for industrial goods, while consumption demand is increasingly focused on services. thus, a shift in the composition of demand from investment to consumption is likely to be

particularly resources ) and services. a depreciation of the australian dollar in response to negative developments in external conditions could be expected to act as a buffer in the way that it has in the past. while i have focused today on a number of the downside risks, we should not lose sight of the fact that the central scenario over the next few years is for a gradual moderation of growth in china. and over the longer term, there is a lot of room for further development of the chinese economy, which will provide australia with many economic opportunities. while the value of non - rural exports to china have declined with the fall in commodity prices, the value of other exports to china have been rising strongly of late ( graph 11 ). we are likely to continue to benefit from rising incomes and the associated demand for high - quality food, goods and a wide array of household and business services from china and the region more broadly. graph 11 bis central bankers ’ speeches