A leading Australian economist has dismissed fears over a Chinese economic collapse as “folly” amid concerns over the commodity-rich nation’s dependence on imports from China.
Bill Evans, the chief economist at Westpac, said that comparisons between the contemporaneous Chinese economy and the Asian financial meltdown of the late-1990s are based on “fear-mongering” and that the huge level of debt accrued in China is much less risky.
Speaking to a GTR event in Sydney today (March 2), Evans said that the comparisons are “irrelevant” given that most of the debt in China is owned by state-owned companies and local government, the creditor to which is the central government in Beijing. In the case of a default, China – which is also a net creditor to the rest of the world – can easily nationalise and absorb the debt.
In 1997, however, the crisis was sparked by high levels of household and commercial debt in Thailand, South Korea and Indonesia, owed to international lenders, which subsequently demanded repayment in US dollars.
Exports to China account for 50% of Australian coal and iron ore sales and the slowdown in the Chinese real estate market has led some to speculate that a dramatic collapse is around the corner. Feeding into these worries is the sheer volume of iron ore in the market: the huge Roy Hill mine in Pilbara is set to start production this year, with similarly sized facilities in Africa and South America also coming online in 2015.
In January, GTR reported on a study which predicted peak steel demand and consumption in China this year. Morgan Stanley analysts wrote: “We now expect 2015 to represent the peak in Chinese steel consumption and production. While we do not expect volumes to collapse, we think growth will shift to negative as the country matures away from heavy fixed-asset investment growth.”
Evans, while acknowledging the correlation between the contracting property sector in China and collapsing commodity prices, was more bullish and predicted a pick-up in the market, based on numerous factors.
Australia’s low-cost iron ore producers will eventually, Evans said, force the high-cost producers of China and elsewhere in the world out of the market, driving prices back up and clearing the way for Australian companies to dominate the market.
Furthermore, recent policy shifts in Beijing have convinced him that the price collapse is temporary. Last weekend, the People’s Bank of China cut interest rates by 250 bps, with the government also set to embark on another bout of fiscal stimulus, which will generate demand in the construction sector.
The long game for China, however, must be in continuing its shift in strategy towards a consumption-based economic model, Evans conceded, which will encourage its citizens to spend their money rather than save it. Currently, a majority of Chinese people save money for healthcare and education. Evans encouraged Beijing to make good on plans to roll out public services in both fields, thus mitigating the need to put money away and galvanising expenditure around China.