If China’s economy is slowing, what does that mean for Australia? Pete Wargent

There has been a lot of reporting about China ‘contracting’ of late, but what does that actually mean?

In terms of the so-called flash PMI reports, a figure of below 50 denotes contraction and a figure of above 50 is expansion.

And last week, the flash PMI figure reported a reading of 49.6 – the first time the gauge has fallen below 50 in 6 months – indicating contraction or ‘shrinking’ factory activity.

But such terms are relative.

The blue bars in the chart below shows the growth rates in China’s industrial production growth figures back to 2008.

Industrial production is still strong.

Clearly, the rate of growth in China’s industrial production is not as high as it was in the years of runaway growth, but then nor could you possibly expect it to be as China is well on the way to becoming the world’s largest economy (as measured on a purchasing power parity basis) probably in the next few years or so.

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So as China’s GDP growth “slows” from 8% to the recently reported 7.7% economic growth for 2013 this is perhaps not nearly as surprising as the headlines often imply, and what is termed ‘contraction’ in activity still translated to a rollicking growth rate as, of course, the economy is still getting bigger each year. Much bigger.

In the ‘data dump’ reported from China this week, retail sales grew at 13.6%, fixed asset investment at 19.6% and industrial production to 9.7%. In other words, a bit slower than before in some cases, but not slow.

In fact, the government’s official growth target is China is only 7.5%, although there is doubtless a good deal of fudging the numbers so that they miraculously always come in close to spot on expectations in order to avoid spooking markets.

That is not to say that there aren’t risks in the China model for there clearly are. Indeed, anywhere which produces ghost cites such as these and these with plans to populate them quickly must truly be facing challenges and stability issues.

And for this reason, China is busy trying to implement a range of reforms to such as to fiscal policy and even family planning regulations in order to encourage stability.

In that context, it’s worth revisiting this article from Michael Pascoe which was published back in June.

Some of the numbers Pascoe quotes are food for thought…in fact, no, they are more than that…they are truly mind-boggling:

“To recap the latest figures that were greeted negatively by the markets: China’s retail sales growth for May was 12.9 per cent, up a fraction on April; Fixed investment was steady at 20.4 per cent growth; Industrial production increased by 9.2 per cent. Tell that to everyone who still thinks a PMI below 50 means production is contracting. And much of the pet shop squawked that these were bad figures. Oh please.

“We are talking about the world’s second biggest economy here that’s comfortably on its way to becoming the world’s biggest on a purchasing power parity basis in four years. Growth of 7.5 per cent is simply outstanding.

And that’s why the commodities boom really isn’t over. The construction bubble stage is, the stratospheric speculative prices are gone, but elevated demand for raw materials continues.

Half of China’s population lives at not much more than subsistence levels down on the farm.

The urbanisation that has marked the past couple of decades is continuing unabated – another 300 million people or so will move into cities over the next 15 years. In terms of housing people, China is building Europe. Again. And the bigger infrastructure build to handle that rolls on.

A recent ANZ Bank presentation slide summarised some of the highlights: one million kilometres of new road, 28,000 kilometres of metro rail, 170 mass transit systems (twice the number that all of Europe has today), 97 new airports and energy demand more than doubling.

So, given the size of the task, who would seriously want China to attempt faster growth than it’s already planning?”

Of course, the eventual outcome of this incredible planned growth story is all rather important to Australia since, increasingly, that’s we send most everything, particularly our vast reserves of iron ore which is used in steel production. It’s one to watch closely.

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Pete Wargent

About

Pete Wargent is a Chartered Accountant, Chartered Secretary and has a Financial Planning Diploma. He’s achieved financial freedom at the age of 33 - as detailed in his book ‘Get a Financial Grip – A Simple Plan for Financial Freedom’. Pete now manages his investment portfolio, travels and works as a consultant in the finance industry from time to time. Visit his blog


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