 |
 |
 |
Business Connections
Connect with Australia China businesses through our online marketplace. Job Connections
A new way for Australians and Chinese to find employment in each others countries.
Events Connections
Click images below for the many EVENTS in China and Australia
Book Connections
The site to find the many books on China.
Back Issues
| The Impact of the GFC on the Chinese and Australian Economies | | Print | |
| Nov/Dec 2008 | |
|
China has the potential to surprise forecasters in 2009 writes Westpac senior economist Huw McKay. The Chinese and Australian economies are impacted by the current circumstances in contrasting ways. To stylise somewhat, Australia's contemporary economy has one foot planted firmly in the financial system of the advanced countries, and the other foot planted squarely in the real economies of Asia. Adverse developments in either area threaten the maintenance of Australian prosperity. China is exposed to the real economic fallout from financial instability in the advanced countries, but it does not require financial stability in the advanced world to pursue its underlying growth model. This is a profound and fundamental distinction that offers some hope that the third leg of this triangle - China's impact upon Australia - will be a relatively benign one. The key foundation of Australian prosperity in the current decade has been the benevolent backdrop of a broad and deep global expansion, itself underwritten by accommodative monetary conditions. Countries with open financial arrangements and sophisticated local institutions - the UK, Australia, New Zealand, Ireland, Iceland, Spain - took advantage of abundant global liquidity conditions to fund domestic credit demands via offshore capital markets. The result was large and expanding current account deficits in these regions and asset price inflation. Heightened risk appetite in the household sector increased the demand for credit and simultaneously reduced the demand for bank deposits, which in turn raised the wholesale financing imperative of banking systems. Loan-to-deposits ratios rose on both strong growth in the numerator and weak growth in the denominator. Extensive securitisation of financial system assets and the use of off balance sheet vehicles meant that the true contingent liabilities of the banking system were understated. Arguably, the international regulatory framework amplified these trends. The Australian financial system now finds itself in an awkward position with the degree of capital availability diminished around the world. Westpac's balance sheet, which is representative of the average of the big four banks, sources 53 percent of its funds from depositors and 47 percent from wholesale sources. Of the wholesale portion, around 58 percent comes from offshore, just over a quarter of the total. The Australian economy has thus become reliant on the ability of the financial system to operate freely in liquid international capital markets. The vicious cycle of deteriorating financial conditions in North America and Europe, and the negative feedback loop of these problems impacting upon the real economy, which in turn impact upon the financial markets, has accelerated recently. China itself has had a remarkable year. A string of natural disasters, lower credit growth, a declining terms of trade, a softer export profile, softening asset prices, the anti-inflation stance of policy and the manmade disruption of the Olympic Games have seen GDP growth decelerate quite steeply. However, once net exports are excluded, activity has been firmer than the headline GDP figures might suggest. China's banking system is almost entirely funded by deposits. The loan-to-deposit ratio of the largest banks is in the mid 0.7 range - around 100bps lower than in the Australia system. The smaller banks have been squeezed by the administration's liquidity management operations. The lowering of required reserve ratios for banks below the top tier is timely, as are the range of policy responses to the softening growth profile put in place in recent months. My intuition is that the Chinese economy will be responsive to stimulus, both fiscal and monetary, and should be back on its feet again soon after a modest hiatus to catch its breath after doubling its GDP per capita between 2002 and 2007 (In nominal local currency terms). From an Australian perspective, the Chinese growth story will be less supportive in 2009 than it was through the heights of the global boom. However, the resource intensity of the economy will continue to rise in coming years as development levels ascend. The rotation of investment towards the hinterland regions and basic infrastructure bodes well for future commodity demand. Depending upon the speed of this rotation, and the rebalancing of the economy generally, China has the potential to surprise forecasters on the upside in 2009: if not with aggregate growth, then in its composition/resource intensity. Further, ongoing diversification of China's foreign exchange and sovereign wealth holdings should assist with Australia's external financing requirements. This last point should be of considerable interest to policy makers with an encompassing grasp of Australia's national interest. Australia's status as a major importer of capital and a major exporter of basic materials presents a very complex forecasting problem in the current climate. Adverse developments in the external financing environment are an unambiguous negative for the domestic growth profile. The dynamics of the real exchange rate are a further cause for caution. The global economy is decelerating, but Chinese growth should be quite resilient due to an assumed sensitivity to policy stimulus and a lack of financial linkages to the rest of the world. The final picture then is one of deceleration for Australia, with downside risks extant. There are also upside risks, mainly deriving from potential scenarios for China itself. These arguments are subordinated in our minds for now, for tabling at a later date when the mood of the markets has repaired sufficiently to hear them. ■ *Huw McKay is a senior international economist with Westpac's economic research team and specialises in pan-Asian economic and market issues.
|
 |
 |