Pacific Money

China Fallout Hits Hard

A growth slowdown in China could have significant implications for the rest of the world.

Anthony Fensom
China Fallout Hits Hard
Credit: Wikicommons

China’s impressive growth over the last two decades has helped commodity prices hit new highs, adding billions to the national income of mineral exporters such as Australia and Indonesia. But with the resource boom turning to bust, just how bad could the flow-on effects be for the region?

One warning of the consequences has come from ratings agency Standard & Poor’s, which has forecast that even a mild slowdown in China’s economy could send Australian unemployment skyrocketing, hitting housing prices as well as commodities.

S&P’s “doomsday scenario” of a hard landing in China of just 5 percent growth in gross domestic product in 2014 would cause Australia to fall into recession for the first time since 1990, send the jobless rate to double-digit territory and cause property prices to sink by 25 percent.

While the agency sees the most likely outcome as a China slowdown to 7.3 percent GDP growth next year, analyst Craig Michaels asked: “Are we now seeing the beginning of the end of Australia’s economic run?”

Japan’s largest brokerage Nomura has forecast that weaker Chinese growth could reduce Australia’s GDP by up to 0.7 percentage points, given that China buys around three-quarters of Australia’s iron ore exports and nearly a quarter of its coal. The result would be the nation’s weakest growth since the global financial crisis, of just 1.4 percent.

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Nomura has forecast that China will post GDP growth of just 6.9 percent in 2014, its lowest rate since 2008. Should it fall under 6 percent, the eurozone’s recession would deepen, while Asia and Japan would lose 0.5 percentage point of growth.

“Economic slowdown in China is one of the reasons why we cut our economic growth forecast to between 5.8 percent and 6.2 percent this year,” Bank Indonesia deputy governor Perry Warjiyo told The Jakarta Post

According to the International Monetary Fund, every 1 percentage point reduction in Chinese GDP reduces Indonesia’s economy by up to 0.5 percentage point, given China’s position as its top export market.

According to the fund, China currently accounts for 30 percent of the world’s total metals imports and 65 percent of iron ore imports, with every one percentage point reduction in its GDP causing a 6 percent decline in oil and base metal prices.

Urbanization the saviour?

But despite the gloom, some analysts still see potential for growth as China continues its industrialization.

Speaking on July 19 at the Noosa mining conference near Brisbane, Platts managing editor, Australia, Paul Bartholomew said China’s slowdown would continue to weigh on the coal and iron ore markets, although a hard landing was unlikely.

“China is moving into a lower phase of growth – but we think 7.5 percent GDP growth this year is pretty achievable,” he said.

“You’ve got to remember it’s a new leadership in Beijing, they have to prove themselves to the Chinese people and the last thing they want is for things to slow, as that could potentially cause social unrest.”

Bartholomew said China was set to overtake Japan as the largest buyer of metallurgical coal, as well as being the world’s largest steel producer at more than 700 million tons a year of crude steel.

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The construction sector accounted for 60 percent of Chinese steel demand, but despite an estimated 39 million empty houses, he said there was still insufficient capacity.

“There’s only enough housing units for about a third of the permanent urban population,” he said. He noted that the migrant workforce of 150 million people typically could not buy housing in their areas of employment, but a proposed law change facilitating this could spur growth.

“Many people would have been to Shanghai and Beijing – they’re very built up cities, so where’s the scope to grow more? But if you get on a plane and go one hour further west, it’s still undeveloped and has a lot of scope for urbanization,” he said.

“China is looking at the central regions and the far west of the country to be the real growth areas of the future…even though there’s been a housing bubble caused by some of the previous stimulus package, people are still willing to invest in [property].”

He said iron ore would shift to a “higher volume, lower pricing” scenario benefiting low-cost producers, while coal would remain “tight” although premium coking coal of the type produced in Australia’s Bowen Basin would still be in demand.

“ASEAN steel consumption grew 12 percent last year – maybe that region is going to be the next important one after China,” he said.