When our buttoned-down economic guardians start using words like
"disruptive adjustment" it's a sign something's amiss.
Over the past few weeks both the Reserve
Bank and the International Monetary Fund have used that same ominous phrase
with reference to Australia's biggest trading partner, China
In essence, the problem is a
corporate debt binge. Credit growth in China has accelerated and is
growing at twice the pace of its economic growth rate. Debt levels have
ballooned to 250 per cent of gross domestic product and alarm bells are
ringing.
So how worried should we be here
in Australia?
No one knows for sure, but
probably a fair bit.
Economists often resort to the
term "uncharted waters" to describe unusual conditions but in
this case the cliche is apt. It is notoriously hard to predict how and when
debt bubbles will unwind in the most transparent of democratic systems. In a
huge one-party-state like China it's even more mysterious.
Few
institutions have invested as much over recent years in understanding the
Chinese economy as the Reserve Bank of Australia.
In its
regular review of financial stability, released on Friday, it described China
as "a key locus of risk" given its increasing size in the global
economy and the run-up in borrowing.
"The
potential for a disruptive adjustment in China remains pronounced, given the
ongoing increase in debt," it said.
The sheer
pace of lending growth makes it likely many loans are going to marginal
borrowers or unprofitable projects. China's growth is slowing and that will
make it harder for highly leveraged firms to service their debts, especially if
loans have funded unviable projects. To make matters worse much of the rapid
growth has been from China's less regulated "shadow banking" sector.
China's
financial system "has become increasingly large, opaque and
interconnected," the Reserve warned.
The IMF's
regular assessment of the Chinese economy, released in August, called on
authorities to "tackle" the debt problem urgently.
Luckily,
Chinese authorities have the capacity to deliver more economic stimulus if
needed.
But the
difficult remedies required to return China to a more sustainable rate of
credit growth are likely to "displace" workers and take a toll on
growth. Any artificial measures used to try and postpone the inevitable
adjustment are likely to make it even more disruptive. And any policy missteps
along the way could deepen the slowdown.
The IMF says
there's "a tangible risk of permanently lower medium-term growth".
Of course, a
sharp slowdown in Chinese growth would hit our economy harder than most and put
many jobs at risk. Australia has the highest proportion of exports going to
China of any advanced economy.
Last
financial year it accounted for more than 30 per cent of Australia's
merchandise exports, up from about 10 per cent a decade earlier. It's also
our largest market for services exports having jumped from around 3 per cent of
the total to 15 per cent in just 15 years. China is Australia's second largest source
of tourists and they spend far more than the average overseas visitor. China is
also a key market for Australia's international education industry.
What's
surprising is that the potential fall-out from China's debt binge doesn't
get much more attention here. The Reserve Bank's warnings about China last week
didn't dominate the headlines. They were eclipsed by another financial risk
highlighted in the report – how a glut of inner-city apartments could leave
highly leveraged investors and property developers exposed should prices slide.
In the first
of three "headland" speeches in late August the Treasurer, Scott
Morrison, also canvassed the economic threat posed by rising corporate debt and
slowing economic growth in China. "Interesting times may lay ahead, and we
must prepare," he said.
It is rare
for an Australian treasurer to talk about the risks that come with Australia's
extensive economic ties with China, not just the opportunities. But the warning
was again overshadowed, that time by Morrison's remarks about "the taxed
and the taxed nots" – how more Australians are likely to go through life
never paying more tax than they receive in government payments than in the
past.
The amount
of quality news and financial analysis about Asia in the Australian media has
improved over the past decade or so. But analysis of the Chinese economy is
still routinely eclipsed by financial news from Europe and North America. We
still pay disproportionate attention to financial events in America
and Britain even though those places have become less important to us
economically. The blanket coverage of Brexit is a case in point – there's
no doubt the aftermath of China's credit boom poses a much bigger economic
threat to Australia than Britain's withdrawal from the European Union, but the
balance of media coverage here doesn't reflect that.
Despite our
growing economic integration with the Asia, deep curiosity about the region
remains strangely limited.
It's high
time that changed.
Matt Wade is a senior writer for the
Sydney Morning Herald llustration: Simon Letch
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