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Hard landing not seen for China

The recent run of weaker Chinese output data is not troubling economists who dismiss concerns that a faster than expected deterioration in the pace of economic growth is in store for the year ahead.

As a major consumer of Australian resources, China’s growth is significant for Australia and the Australian dollar is regarded as a proxy for the Chinese economy by offshore investors.

Most economists see a slowdown ahead but accept this is a fair trade-off for implementing reforms the ruling Communist party has pledged which will, among other achievements, result in more open financial markets.

UBS interest rate strategist Matthew Johnson sees a slight drop in the pace of growth in the fourth quarter. Official gross domestic product data is due later this month.

“To the extent that Chinese demand has led to strong Australian exports, then a softer Chinese growth outlook should lead to a weaker Australian dollar,” he said.

The currency was fetching US89.3¢ on Tuesday as Australia’s trade deficit narrowed.


However, scepticism underpinned by lacklustre PMI, or purchasing managers index, readings could be overdone. The latest services PMI published by HSBC showed growth in China’s services sector slowed sharply in December to its lowest point since August 2011.

Separate surveys a week earlier showed that factory activity expanded at the slowest pace in three months.

Mr Johnson said this could be attributed to consolidation in some key industries such as the steel sector.

“I don’t think the moves have been really enough to be certain there’s any change. I’m not actually convinced it’s telling us anything new about China ... The fact that there’s a mapping between PMIs and GDP is a happy coincidence: one tells us how broad growth is, the other tells us by how much output increased,” he said.

“After the recession in the UK, the PMIs were very strong but growth was weak – it turns out that there was a weak but broad based improvement. My guess is that a similar thing is occurring in China ... Consolidation of Chinese industry means that we may see firm growth without high PMIs.

"For example, if you shut down the small steel mills you’re going to have more productive or more efficient ones left – which is good for growth – but the PMIs will be biased down by this change as growth will be narrow as it’s concentrated among the larger mills.”

ANZ China economist Li-Gang Liu also highlighted seasonal factors at play which could be influencing PMIs.

“We have been saying that in the last quarter of the year we find that Chinese manufacturers are very cautious in restocking their inventory in terms of commodity and other manufacturing inputs, and this has been more or less reflected in the current trend of PMIs suggesting the momentum is tapering off a bit.”

His growth forecast is 7.6 per cent for the year ahead.

The economist pointed to reports that China is considering offering banking licenses to privately owned lenders as evidence of the government’s commitment to liberalising the financial sector. Further competition amongst lenders should have the effect of bringing down the cost of credit and stimulating borrowing among small and medium enterprises.

“Overall I think if China’s banking system is more competitive the cost of credit should go down rather than go up,” he said.

Mr Liu believes China can tolerate a slower rate of growth because it has beat its official forecasts for the past few years, providing some headroom under the government’s five-year plan.